The new financial advice regime: Ready, set, go!
The new financial advice regime came into force on 15 March 2021. Insurers and their advisers should by now be well prepared for the changes. Given the lengthy delays to the start of the new regime, we expect that the Financial Markets Authority (FMA) will not tolerate advisers being ill-prepared.
Insurers and brokers must now:
- Comply with new duties under Part 6 of the Financial Markets Conduct Act 2013 (FMCA). The key duties are:
- prioritising clients’ interests where there is a conflict of interest by taking all reasonable steps to ensure financial advice is not materially influenced;
- 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.
- Hold a transitional licence and be able to comply with its conditions: All financial advice providers must hold a transitional licence to continue to provide financial advice services under the new regime. Those that have obtained a transitional licence should take note of its standard conditions. These are:
- creating and maintaining records; and
- having an internal complaints process;
- Provide the prescribed disclosures: As provided above, new disclosure obligations now apply to those giving financial advice to retail clients. Insurers and brokers should have prepared their disclosure documents to include the necessary disclosures and updated their websites to include the required publicly available information. Certain information, such as conflicts of interest, reliability events and dispute resolution information, is also required to be disclosed when the nature and scope of the advice is known, when the advice is given and when a complaint is received. Insurers should bear in mind the form and manner requirements for disclosure, which require any disclosures to be clear, concise and presented in an effective manner. Insurers should note that the prescribed disclosures, if presented with other information, must be given prominence.
Financial advice providers now have the benefit of a two-year transitional period before they must hold a full licence and comply with its conditions. While the full licence conditions are onerous in comparison to the transitional licence conditions, there may be some advantages in applying for a full licence before the two-year period expires. Insurers and brokers should turn their minds to when they should apply for a full licence application and what they need to do in order to comply with the full licence conditions.
Financial advice providers now have the benefit of a two-year transitional period before they must hold a full licence and comply with its conditions.
The full licence conditions are:
- creating and maintaining records;
- having an internal complaints process;
- providing the FMA with regulatory returns;
- having appropriate arrangements for any outsourcing;
- having and maintaining appropriate business continuity and technology systems;
- meeting ongoing eligibility and other requirements; and
- notifying the FMA of material changes.
Solvency Standards Review Principles Confirmed
This month, the Reserve Bank of New Zealand (Reserve Bank) confirmed its principles for the review of insurance solvency standards following its consultation earlier last year. Overall, there was general support for the principles and the review. However, following consultation, the Reserve Bank has shifted the principles of the review away from viewing solvency standards as protecting an insurer’s ability to account for risks impacting its balance sheet to protecting its ability to meet its obligations to policyholders.
The principles for the review are:
- To take a “substance over form” approach and tailor the solvency requirements to New Zealand;
- To have regard to international comparability, particularly LAGIC, Solvency II, the ICS and the ICPs, with the caveat that principle number 1 will take precedence;
- Capital must be of sufficient quality to enable insurers to meet obligations to policyholders in a range of adverse scenarios;
- The quantum of capital requirements should be set in relation to material risks that may impact the insurer’s ability to meet its obligations to policyholders;
- Insurers should be subject to consistent methods and consistent assumptions in determining capital requirements;
- Capital requirements of New Zealand insurers should reflect a risk-based approach, taking into account the risks that are specific to New Zealand, the nature of the New Zealand market, and the Reserve Bank’s regulatory approach;
- The solvency framework should be practical to administer and minimise unnecessary complexity and compliance costs;
- The solvency framework should be transparent to enable effective market discipline; and
- The Reserve Bank will have regard to how the solvency requirements work together with other regulatory measures to meet the principles and purposes of the Insurance (Prudential Supervision) Act 2010 (ISPA).
New consultation on IPSA
Consultation on IPSA closed on 18 February. The consultation on IPSA focused on the first two of eleven modules for consultation as part of the review: scope of the legislation and overseas insurers. The Reserve Bank is considering the submissions on this consultation and is yet to publish any decisions.
The key points from the consultation were:
- whether the Reserve Bank should amend the definition of a “contract of insurance”, including adding a list of exclusions from the definition or a power of the Reserve Bank to deem a contract to be a contract of insurance;
- whether further guidance is necessary on whether an insurer will be carrying on business in New Zealand and whether a “New Zealand policyholder” requirement should be included in that test; and
- how overseas insurers operating in New Zealand should be treated under IPSA and what kind of supervision they require.
COFI Bill set for second reading
Following the Finance and Expenditure Committee (FEC) Report, the Financial Markets (Conduct of Institutions) Amendment Bill (COFI Bill) is set to have its second reading. The COFI Bill is hovering around seventh to tenth in line for Parliament’s consideration.
The COFI Bill proposes amendments to the Financial Markets Conduct Act 2013, amongst other enactments, to ensure that the specified financial institutions and their intermediaries comply with a principle of fair conduct and associated duties and regulations.
The FEC made the following changes to the COFI Bill:
- Clarifying the fair conduct principle by inserting a number of factors relevant to the requirement to treat consumers fairly;
- Inserting sections that require certain content to be included in fair conduct programmes, which was previously to be prescribed through regulation;
- Requiring that financial institutions provide their fair conduct programme to the FMA, and publicly disclose only a high-level summary of their programme (as opposed to the previous requirement to disclose the entire fair conduct programme publicly);
- Clarifying the threshold for non-compliance with the fair conduct programme: financial institutions must take all reasonable steps to comply with their fair conduct programme;
- Including a list of matters for the Minister to have regard to before recommending regulation or prohibition of incentives;
- Narrowing the range of intermediaries that the power to regulate or prohibit incentives can apply to. Intermediaries under such regulation are only those involved in the chain of distribution; and
- Reducing the extent obligations apply to intermediaries. Financial institutions must manage and supervise intermediaries, as well as provide ongoing conduct training.
We expect strong debate on the prohibition upon incentives, given the strong opposition on this point from the National Party when the COFI Bill was first read. The COFI Bill proposes to allow regulators to prohibit sales incentives based on volume or value targets, e.g. soft commissions such as overseas trips, bonuses for selling a certain number of financial products, leader boards and performance management based on sales volumes. Insurers and brokers should consider whether and to what extent this will affect their current remuneration structures.
We also expect further substantive consultation on regulations to support the COFI Bill, in particular on incentives, intermediaries and further detail on what must be included in fair conduct programmes.
Finally, we note that the Insurance (Prompt Settlement of Claims for Uninhabitable Residential Property) Bill (PromptSettlement Bill), which was a private member’s bill, is to be withdrawn on the basis that the COFI Bill will cover insurers and the issues that the Prompt Settlement Bill intended to address. In addition to the COFI Bill, other reforms will capture some of the intent of the Prompt Settlement Bill, including changes to the Earthquake Commission process and the Fair Insurance Code, which includes a timeframe for deciding whether to accept or decline claims.
Bill to reform insurance contracts law
The Ministry of Business, Innovation and Employment has announced that it will release an exposure draft Bill for consultation in mid-2021 which will address what it views as insufficient consumer protection in insurance contracts. The Bill should include the Cabinet decisions from November 2019, introducing new provisions that:
- Place the responsibility on insurers to ask consumers the right questions when processing new insurance policies, rather than leaving it to consumers to know what to tell their insurer;
- Require insurance policies to be written and presented clearly, so that consumers can easily understand them;
- Ensure that insurers respond proportionately when consumers don’t disclose something they should have, or misrepresent themselves;
- Strengthen protections for consumers against unfair terms in insurance contracts; and
- Extend powers to the FMA to monitor and enforce compliance with new requirements.