The government has confirmed it will ban all volume-based sales incentives on financial products for ‘frontline’ operatives among a host of proposed amendments to the Financial Markets (Conduct of Financial Institutions) Amendment Bill handed down last week.
In a just-published Cabinet paper, Commerce Minister David Clark says regulations for the incoming legislation – known as COFI – will “expressly prohibit financial institutions and intermediaries from offering sales incentives based on volume or value targets to their frontline employees, agents and intermediaries”.
However, Clark says the volume-based incentive ban will “exclude senior managers and executives from the scope because the greatest conflict of interest is likely to occur at the mid-to-lower levels of an organisation where individuals are more directly involved in the chain of distribution”.
Despite holding the hard-line on volume-based payments, the COFI update shows the government has backed-off from some of the other controversial features of the proposed legislation, including the original wide scope of institutional oversight of third-party intermediaries.
“… I intend that the Bill’s provisions will be more flexible and less prescriptive. I propose to remove the obligations on financial institutions that currently require them to train and manage or supervise intermediaries,” Clark says. “However, financial institutions will continue to have high-level obligations to have effective policies, processes, systems and controls…”
Furthermore, he says the government will table other COFI amendments – to be enshrined in a supplementary order paper (SOP) – that limit the definition of ‘intermediary’ to those engaged in “selling or distributing products or services to consumers”.
“This means financial institutions will have responsibilities under the Bill to oversee these parties (e.g. financial advice providers such as insurance or mortgage brokers, retailers selling add-on insurance or credit) but not parties involved in broader preparatory, administrative and claims fulfilment services (e.g. lawyers, plain English writers, panel beaters in relation to motor vehicle insurance),” Clark says.
But the Minister has rejected calls from many submitters in the COFI consultation process last August for the law to allow institutions to distinguish between advisers governed under the Financial Services Legislation Amendment Act (FSLAA) and other intermediaries.
“I have considered these views but concluded that it would not be appropriate to narrow financial institutions’ obligations in a way that excludes their distribution arrangements with intermediaries who are regulated under FSLAA,” Clark says. “It is important that financial institutions understand (and are responsible for) whether consumers are experiencing good outcomes from their relevant services and products, regardless of the distribution channel used.”
Among other changes, the refined COFI will mandate insurance contracts as “financial products under fair dealing provisions” while also exempting Lloyd’s from many of the legal obligations under the proposed law.
David Ireland, Dentons Kensington Swan partner, said the amendments represent a “couple of positive outcomes” for the financial services industry, albeit that much of the practical detail remains to be nutted-out in regulations.
“There’s still a bit of working out how to apply the proposals in practice – such how far institutions must go in ‘monitoring’ intermediaries,” Ireland said.
He said the industry was looking forward to a thorough consultation process on the final shape of COFI regulations once the law is passed.
“But it’s fantastic that MBIE and the Minister have recognised and responded to industry concerns raised in the earlier consultation,” Ireland said. “The outcome should be a better balanced legislation.”
COFI has been stranded in a parliamentary vortex since its second reading was interrupted last June.
“I intend to table an [sic] SOP following Cabinet approvals and drafting by the Parliamentary Counsel Office, with the intention of passing the Bill by mid-2022,” Clark says.
But COFI won’t complete its second reading this month: the proposed law has been bumped back to 25th on the latest parliamentary order paper, squeezed between the Organic Products Bill and the Screen Industry Workers Bill.