Government has been urged to limit the impact of proposed financial institution conduct obligations on intermediaries in a raft of submissions released last week.
Many of the 69 responses to two consultation documents published earlier this year on the Financial Markets (Conduct of Institutions) Amendment Bill, known colloquially as COFI, call for a light-touch approach to regulating intermediaries captured under the mooted legislation.
COFI will impose a new conduct licensing regime on banks, insurers and other non-bank deposit-takers but the draft legislation also requires those institutions to retain some oversight of financial intermediaries that may use their products.
The two April consultation documents covered broader COFI provisions (including the ability of government to ban certain remuneration practices) and the treatment of intermediaries, respectively.
In the intermediaries consultation, the Ministry of Business, Innovation and Employment (MBIE) laid out five options ranging from strict to looser responsibilities on institutions for the behaviour of third-party intermediaries such as financial advisers.
The majority of respondents, including the Financial Services Council (FSC), favoured the lighter end of the regulatory spectrum.
“We do not consider that managing and supervising reflects the correct level or responsibility a financial institution should have towards its intermediaries as it does not represent the nature of the relationship between financial institutions and their distributors (in addition to requiring intermediaries to voluntarily give up management control of their business). It would be impractical for intermediaries to be managed and supervised by multiple financial institutions,” the FSC submission says.
“… Requiring financial institutions to monitor their intermediaries’ advice, sales and distribution of other providers’ products could give rise to conflicts of interest or issues with commercial confidentiality. It would be unduly onerous for financial institutions, without furthering the objective of the intermediaries’ provisions.”
Legal outfit Dentons Kensington Swan (DKS) also argues against weighting COFI-ruled institutions with strong duties to manage intermediaries.
“Our key concern with the current drafting is the extent of the requirement to oversee and manage intermediaries (which seems unworkable) and the extent of the overlap between the obligations that now apply to some intermediaries under the new financial advice regulatory regime introduced under the Financial Services Legislation Amendment Act 2019 [FSLAA],” the law firm says.
And the response – authored by DKS partners David Ireland and Catriona Grover – further calls for a restrained definition of ‘monitoring’.
The MBIE consultation paper “contemplates monitoring whether the intermediary is communicating clearly, concisely, and effectively with consumers about the financial institution’s products”, the DKS submission says.
“This is excessive, and would amount to an unreasonable intrusion in the intermediary’s business. In our view the obligation should be limited to simply requiring reporting from the intermediary, and monitoring at the entity level to verify that processes are in place, without requiring deep dives into individual advisers’ file records.”
Elsewhere, the financial advice provider (FAP), Wealthpoint, notes that under FSLAA many financial institutions are already “demanding far more onerous obligations than the regulations require”.
“Many Financial Institutions in NZ are large and have large market share and Financial Advisers will have no choice but to comply with terms those Financial Institutions require. The Financial Markets (Conduct of Institutions) Amendment Bill will place significant costs on both Financial Institutions and intermediaries and the effect will be wide ranging, and the full costs and effects unknown,” the Wealthpoint submission says.
“The concern is that Financial Advisers and FAPs will be more concerned about providing seemingly endless required information to numerous Financial Institutions than they will at providing financial advice to customers. There will be significant costs that presumably Financial Institutions will ultimately pass some or all on to customers. The Bill is poorly timed given FSLAA has only recently come into effect and the effects of full licensing are not yet felt.”
Respondents also reported mixed feelings about establishing different COFI-monitoring rules for FSLAA and non-FSLAA advisers.
For instance, AMP says the proposed distinction between the two groups is “too simplistic” as it ignores the differences between employed financial advisers (FAs), nominated representives (NRs) and independent financial advisers.
“AMP proposes that employed FAs and NRs be included in MBIE’s FSLAA intermediaries category, and that Independent FAs be categorised somewhere between them and MBIE’s non-FSLAA intermediary category,” the group’s submission says.
“Independent FAs have historically been, and continue to be, less monitored. Their non-employed status (by their engaging FAP) means there is less control of their conduct. This is a natural consequence of their greater distance from their FAP’s oversight. Conversely, employed FAs, like NRs, tend to have higher degrees of control over their advice, underpinning greater uniformity in standards of advice and, one should expect, client outcomes.”
Among other issues, many submitters – including the FSC and Financial Advice NZ – called for government to exercise only minimal powers to ban remuneration practices.
DKS, for example, says any ban on financial product sales incentives should be “tightly prescribed”, albeit adding a fees-for-no-service warning.
“We recommend that consideration be given to only permitting trail commissions (or their equivalent) where evidence of service can be produced by the recipient, or at least evidence of actively offering to provide services to the customer,” the DKS response says. “It is important to restrict commissions from being paid where no services are in fact provided. There is no consumer benefit from doing so, with fees for no service likely to increase the cost of providing services (and hence the likely cost to the consumer) for no apparent benefit.”
COFI is currently in the legislative waiting room, ranked seventh on the order of business for its second reading to continue when parliament last sat on September 30. The MPs gather again in Wellington this Tuesday (October 19).