Regulatory update, including the Conduct of Financial Institutions Bill
In this article we examine current regulation and proposed changes affecting insurers and brokers.
Conduct of Financial Institutions Bill
The Government has made it clear that ensuring that financial institutions’ “conduct and culture” result in good outcomes for all customers is a priority, following reports reports from the Financial Markets Authority and the Reserve Bank of New Zealand on conduct failures in the financial sector.
To that end, it has introduced the Financial Markets (Conduct of Institutions) Amendment Bill (CoFI) which received its first reading in February 2020.
The COFI Bill proposes a new regime for specified registered banks, licensed insurers and licensed non-bank deposit takers (“specified financial institutions”). The proposed regime will apply broadly to all services and associated products provided by specified financial institutions and, to varying extents, to other financial businesses and intermediaries which deal with or represent specified financial institutions. As insurers and brokers will be captured by this new regime, they should keep a close eye on its progress through Parliament.
Key elements of the proposed regime
If passed, the COFI Bill will amend the Financial Markets Conduct Act 2013 to ensure that specified financial institutions and their intermediaries comply with a principle of “fair conduct” and associated duties and regulations. The COFI Bill proposes the following:
- Specified financial institutions that are in the business of providing relevant services must obtain a licence from the FMA under Part 6 of the FMC Act. ‘Relevant services’ are defined as acting as an insurer (in relation to a consumer insurance contract, or other life or health insurance), being a creditor under a consumer credit contract, providingother retail financial services (of the kind that require registration as a financial services provider), or acting as a paid intermediary to a consumer for any of those activities.
- Specified financial institutions and intermediaries must comply with a fair conduct principle to treat consumers fairly, including by paying due regard to their interests in specific circumstances. The specific circumstances are when a financial institution: (a) designs any relevant service or any associated product; (b) offers to provide any of those services or products to a consumer; (c) provides any of those services or products to a consumer; or (d) has any dealing or interactions with a consumer in connection with any of those services or products). The fair conduct principle also applies when an intermediary is involved in the provision of any relevant service or any associated product to a consumer.
- Specified financial institutions must establish, implement, and maintain an effective fair conduct programme which meets the minimum requirements set out in the FMC Act. This requires operationalising the fair conduct principle through policies, processes, systems, and controls throughout every relevant part of their business, from the governance level to day-to-day interactions with consumers, whether those interactions are made directly or indirectly through intermediaries.
- Specified financial institutions and their intermediaries must comply with the fair conduct programme, and specified financial institutions must ensure the intermediaries comply. This is aimed at ensuring that the chain of distribution of services and products is captured and so institutions take responsibility from the top down.
- Specified financial institutions and intermediaries must comply with any regulations that regulate incentives based on volume or value sales targets. The possible regulations may apply to incentive arrangements entered into before the COFI Bill or its regulations have been enacted.
- An insurance contract may be brought outside the scope of this new regime if a policyholder certifies in writing before entering into the contract that they are entering into the contract wholly or predominantly for business purposes.
The COFI Bill is at Select Committee stage, which aims to report back by 23 June 2020. Entities that may be affected can make submissions on the proposed bill up until 26 March 2020.
Insurance contract law review
The Government has also been reviewing insurance contract law to ensure that it facilitates insurance markets that work well and enable individuals and businesses to protect themselves against risk effectively. An issues paper and an options paper were released in mid-2019 seeking public comment on the proposed policy decisions.
In December 2019, MBIE proactively released a paper and minutes of the Cabinet Economic Development Committee indicating what the Government intended to reform. In summary, the Committee has agreed:
- to change policyholders’ duty to disclose material information so that:
- consumers must simply take reasonable care not to make a misrepresentation
- while non-consumers are required to make a fair presentation of risk
- to change the remedies for non-disclosure and misrepresentation for both consumers and non-consumers to provide proportionate consequences based on how the insurer would have reacted to the information at application time, and whether the policyholders intended to mislead or deceive the insurer or were reckless;
- to require insurers to inform policyholders of the duty of disclosure and its consequences before they enter the contract;
- that if an insurer seeks permission to access a consumer’s medical or other third party records, the insurer must inform consumers of the types of third party information they are likely to access and when this is likely to happen, which the FMA will be responsible for monitoring and enforcing compliance;
- to remove insurance-specific exemptions from the unfair contract terms provisions in the Fair Trading Act 1986 and clarify how the generic exemptions apply to insurance.1 The FMA will share responsibility with the Commerce Commission for enforcing unfair contract terms in relation to contracts for financial services or in relation to financial advice products;
- to require consumer insurance policies to be presented and worded clearly to help with consumer understanding; and
- that the duty of utmost good faith be codified in legislation and will apply to both parties in an insurance contract;
- to introduce a legislative requirement for intermediaries to pass onto the insurer all known material information – so that the insurer can recover losses against the intermediary if the intermediary fails to pass on information;
- that certain policy exclusions will not be subject to section 11 of the Insurance Law Reform Act 1977 (which provides that if a policy exclusion applies in relation to a claim but the exclusion did not cause or contribute to the loss, then the insurer must accept a claim);
- to replace section 9 of the Law Reform Act 1936 (which allows a third party wronged by a policyholder to place a statutory charge on the policyholder’s insurance proceeds in certain cases) with a provision that allows third parties to claim directly against the insurer;
- to amend section 9 of the Insurance Law Reform Act 1977 to provide that an insurer under certain types of liability policies can decline a claim if the policyholder notifies the insurer after a defined period after the end of a policy term.
We are expecting the release of an exposure draft bill, which may be supplemented by new regulations, for consultation in 2020.
Regulation of financial advice
The new financial advice regime introduced by the Financial Services Legislation Amendment Act 2019 will come into effect on 29 June 2020 on which date all new obligations, aside from transitional requirements around competency, will come into effect. Anyone providing financial advice to retail clients from 29 June 2020 onwards will need to hold a transitional licence and comply with all obligations. For those solely providing financial advice to wholesale clients, there is no licensing obligation but there may be other obligations that apply.
The regulations supporting this regime are intended to be formally released in the coming months, with likely transitional provisions for disclosure requirements. We understand that the custody and broking requirements will continue in substantially the same form under the new regime with minor amendments.
The Code of Professional Conduct for Advice Services was finalised in 2019 but may have further guidance released to aid in applying the requirements.
Additional policy updates
The Reserve Bank suspended active work on the review of the Insurance (Prudential Supervision) Act 2010 in April 2018 following a careful prioritisation exercise. It is intended that this work will resume in due course. Over the course of the review the RBNZ intends to undertake further consultation to identify policy concerns and develop proposals to address these concerns effectively.
- Further consultation is expected on options to clarify how generic exemptions of unfair contract terms apply to insurance.