New conduct regime for banks, insurers and NBDTs announced

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On 25 September the Government announced wide-ranging legislative reforms to govern the conduct of financial institutions. 

​​​​​​​Today the Government announced wide-ranging legislative reforms to govern the conduct of financial institutions. 

A new licensing regime will be introduced for banks, insurers and non-bank deposit takers (NBDTs) in respect of their general conduct, including aspects of how they design and offer sales incentives. Licensed entities will be accountable for sales made by intermediaries who are not financial advice providers, and sales incentives based on volume or value targets will be prohibited.

The legislation is expected to be introduced by the end of 2019. Details of the proposed reforms are available in a Cabinet Paper and on MBIE's website here.

The reforms are a response to the Financial Markets Authority (FMA) and the Reserve Bank's joint conduct and culture reviews into the sales and conduct practices within New Zealand banks and insurers following revelations emerging out of Australia's Hayne Royal Commission.

The proposed reforms were raised in an options paper released for consultation in April this year, which closed on 7 June and received 85 submissions.

New conduct licensing regime

At the core of the reforms will be a requirement for banks, insurers and NBDTs to be licensed by the FMA under Part 6 of the Financial Markets Conduct Act 2013 (FMC Act) in respect of their general conduct. The FMA will be able to impose specific licensing conditions and tailor its approach to specific businesses and circumstances.

The Government has proposed that banks and insurers would be licensed first, with NBDTs following at a later date.

A similar approach has been taken by the United Kingdom which requires financial services providers, investment firms and consumer credit firms to be authorised by the Financial Conduct Authority. Similarly, in Australia all businesses providing financial services or dealing in financial products in Australia must hold an Australian Financial Services licence covering organisational competence and compliance aspects.

High-level fair treatment standard

The licensing regime will be built around a requirement for licensed entities to meet a high-level fair treatment standard. The precise boundaries of the standard will be developed through the drafting process. However, it will focus on fair treatment of customers and having regard to customers' interests (this is an acknowledged departure from MBIE's initial proposal of a duty to prioritise customers' interests). Licensed entities will be required to have policies, processes, systems and controls in place to meet this fair treatment standard and ensure that their business models and strategies take customers' interests into account. Detailed obligations will be set out in the FMC Act, regulations and conditions of licences as appropriate to achieve the standard. It is also anticipated that the fair treatment standard will create the framework for further obligations in the future, including in relation to communication with customers and claims handling.

The fair treatment standard will apply to all aspects of the business that relate to retail customers, including all products and services offered by banks, insurers and NBDTs to retail customers, at all points of the lifecycle of the products and services. This includes credit, insurance, KiwiSaver, and associated services (e.g. complaints and claims handling, information provision). The concept of “retail customer" will be broadly consistent with similar concepts in the FMC Act.

Remuneration and incentives obligations

The licensing regime will also include remuneration and incentive obligations. Banks, insurers and NBDTs will be required to consider the risks and potential harms that their incentives create, and then design and offer their incentives in a way that minimises the risk and is consistent with the overarching fair treatment standard.

Whistleblowing and mandatory reporting requirements

The new licensing regime will be supplemented by additional requirements to improve its effectiveness. The Government has expressly referred to the possibility of introducing whistle-blowing protections and obligations to self-report material contraventions of the regime.

Expanded FMA Enforcement

The FMA will be given powers to monitor and enforce licensing obligations on an ongoing basis, including the ability to direct licensed institutions to change behaviour, improve their systems and processes, as well as suspend or vary the conditions of a licence. The Government has acknowledged that this will likely involve an increase in funding for the FMA.

Strong civil liability and pecuniary penalties will apply for contravention of the licensing regime and any associated obligations. These will match the existing enforcement tools and maximum penalties available under the FMC Act.

Executive liability may not be far off

Although not part of the existing proposals, the Government has indicated that mechanisms for increasing accountability for senior executives of financial institutions for the conduct of their institutions are likely to be progressed in the short term. This work will be coordinated in consultation with the Reserve Bank.

Mechanisms to address the conduct of intermediaries

To ensure that the obligations on banks, insurers and NBDTs flow down the supply chain and result in better outcomes for customers that deal with intermediaries, licensed entities will be accountable for sales made by intermediaries who are not subject to the financial advice regime (to be introduced under the Financial Services Legislation Amendment Act 2019).

Prohibition of sales incentives based on volume or value targets

The Government has decided not to ban all commissions. Instead, it proposes to remove particular incentive structures based on volume or value targets that create particularly perverse incentives to sell. This will apply to banks, insurers, NBDTs and their intermediaries, covering incentives both to internal staff and external intermediaries, and cover monetary and non-monetary incentives of any kind.

Next steps

Given that the legislation is being fast tracked, it is unlikely that an exposure draft of the Bill will be released for consultation prior to the Bill being introduced to Parliament. However, MBIE has indicated that it is open to feedback at any time on its work on conduct of financial institutions.

Submissions will be open on the legislation when it is before the select committee.

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