Regulatory update, including impact of COVID-19 on law changes
In this article, we examine COVID-19’s impact on proposed law changes affecting insurers and other financial institutions.
The Government’s focus has predominantly been on responding to the health and economic consequences for New Zealand during the COVID-19 pandemic. To relieve the operational and regulatory burden on insurers (and other financial institutions), the Government has provided regulatory relief, including introducing several changes to financial services law. In return, financial institutions are expected to focus on the needs of their customers during the COVID-19 pandemic.
Regulator’s expectations of insurers during COVID-19
The Financial Markets Authority (FMA) released a public letter to the insurance industry outlining its expectations for insurers during the COVID-19 pandemic.
The FMA made clear its expectation that insurers remain aware of the current challenges for New Zealanders and offer support and flexibility to policyholders. Insurers are also expected to maintain or reduce costs for consumers.
The FMA’s primary concern was insurers’ responses to policyholders in financial hardship. It encouraged insurers to publicise relief offers to encourage policyholders in difficulty to contact their insurer. Insurers are expected to ensure all offers of relief, such as cover suspension or payment holidays, are clearly explained and clearly communicate any COVID-19 policy exclusions. The FMA also encouraged insurers to increase call-centre capacity and ensure complaints processes are fit-for-purpose.
The FMA will continue to actively monitor insurers’ responses to the COVID-19 pandemic, and how they are supporting their customers’ needs.
Delay to the financial advice regime
The Minister for Commerce and Consumer Affairs agreed to delay the start of the new financial advice regime set out in the Financial Services Legislation Amendment Act 2019 (FSLAA). The regime will be delayed from its 29 June 2020 proposed commencement date to early 2021. The FMA has indicated that the regime will be introduced between March and May 2021. Transitional licensing remains open, with transitional licences coming into effect at the start of the new regime.
This delay, which will come as a relief to the industry, is one of many steps that the Government has taken to support financial institutions throughout the COVID-19 pandemic. As discussed above, it has allowed financial institutions to focus on helping clients during the pandemic.
In the meantime, the status quo remains and the Financial Advisers Act 2008 continues to apply. Insurance industry participants should continue to comply with their obligations under this Act.
While the delay to the regime will give insurers that become financial advice providers, and their underlying advisers, a longer period to prepare for the regime’s commencement (and the new obligations it imposes), financial advisers need to reflect on the implications of the current remaining in force for some time.
Key elements of the proposed regime
FSLAA will repeal the Financial Advisers Act and insert a new financial advice regime into the Financial Markets Conduct Act 2013. Anyone providing financial advice to retail clients from early 2021 onwards will need to hold a transitional licence and comply with the obligations under the new provisions in the FMCA.
In brief, FSLAA will impose a licensing requirement on those providing a financial advice service to retail clients, and new duties on financial advisers which provide regulated financial advice. While most obligations only apply to those giving financial advice to retail clients, certain obligations will apply to financial advice given to both retail and wholesale clients.
The new duties include:
- prioritising clients’ interests;
- exercising the care, diligence and skill that a prudent financial adviser would exercise when giving financial advice;
- taking reasonable steps to ensure that clients understand the nature and scope of the advice, including any limitations;
- meeting competence, knowledge and skill requirements under the new Code of Professional Conduct for Financial Advice Services; and
- complying with new disclosure requirements defined in the regulations, including ensuring that those disclosures are not misleading, deceptive or incomplete.
Delay to supporting regulations
In parallel with the FSLAA’s passage, the Ministry of Business, Innovation and Employment (MBIE) has developed regulations that set the disclosure obligations for the new regime. While the draft disclosure regulations have been released, the finalised disclosure regulations have been delayed. We expect that these will be released in the third quarter of this year. We expect changes to be made following consultation on the draft disclosure regulations in October 2019. Among other things, we expect that nature and scope disclosure, and advice disclosure, may be able to be combined.
Delay to the review of IPSA
External work on the Insurance Prudential Supervision Act 2010 (IPSA) review has been delayed for an initial period of six months. The long-anticipated review, which commenced in March 2017, will focus on the scope of IPSA, its application to overseas insurers and the requirements for disclosure and financial strength ratings. The Reserve Bank released its Issues Paper Feedback Statement in October 2017, however, no option paper has yet been released for consultation.
Expected Delays to the COFI Bill
The Financial Markets (Conduct of Financial Institutions) Amendment Bill passed its first reading on 12 February 2020. The consultation period for the Bill, which currently sits with the Select Committee, was delayed until 30 April 2020. While the conduct of financial institutions remains an important matter for the Government, we expect further delays to the Bill’s introduction.
Insurance contract law review continues
MBIE is completing a review of New Zealand’s insurance contract law. The review’s purpose is to ensure insurance markets work well and enable individuals and businesses to effectively protect themselves against risk. Despite the delays to other proposed law changes, MBIE has not announced a delay to the insurance contract law review. As outlined in our March 2020 issue of Cover to Cover, MBIE announced decisions it would make in response to the consultation on its options paper released in April 2019. Further consultation is expected in mid-2020, when an exposure draft Bill is to be released.