The conduct of financial institutions (COFI) legislation has emerged largely intact from the select committee process but with some small wins for the local industry.
Most notably, the select committee COFI report, handed down last Friday, added an extra year to the proposed transition period.
“We believe that a maximum transition period of two years is too short. By providing for a longer transition period (if one is needed), the bill would enable the Government to further consult on and develop supporting regulations. It would also give the industry adequate time to prepare for the regime.
“… We also note that the bill enables the requirement to hold a licence to be phased in over a period of up to four years. We recommend that this be extended to five years.”
As well as providing some time relief, the select committee recommended a number of other tweaks to the COFI bill to provide clarity for the industry and flexibility for the government.
Among a dozen substantive recommendations, the select committee report says the proposed law should include some restraint on the government’s ability to ban incentives.
“Some submitters were concerned that this would enable the Minister to ban all incentives. If so, it could affect the livelihood of financial advisers, and therefore negatively affect the availability of financial advice,” the report says.
“That is not the policy intent of the bill. We recognise that if the Government had intended a total ban on all incentives, it would have been more appropriate to do this through primary legislation.”
Under the proposed amendment, the relevant government minister “must consider whether the matters covered in regulations [to abolish incentives] would not more appropriately be dealt with in primary legislation”.
The committee also plumped for a tighter definition of when the COFI incentives regulations might apply, and to who.
According to the report, the change ensures “that the regulations would only cover persons, entities, or activities that are directly involved in the chain of distribution for relevant products and services, or financial advice”.
“That is, incentives regulations would not apply to activities such as claims management.”
In broader proposed amendments, the revised COFI bill also adds further detail around the ‘fair conduct principle’ definition.
The new non-exhaustive list of ‘fair conduct’ in practice includes:
- paying due regard to consumers’ interests;
- acting ethically, transparently, and in good faith;
- assisting consumers to make informed decisions;
- ensuring that the relevant services and associated products that the financial institution provides are likely to meet the requirements and objectives of likely consumers; and,
- not subjecting consumers to unfair pressure or tactics or undue influence.
Furthermore, the select committee report provides guidance on how institutions should build systems to comply with the fair conduct principles.
“The requirements would relate to the design of the programmes, the management of risks associated with a failure to comply with the fair conduct principle, and identifying conduct that fails to comply with the fair conduct principle,” the report says.
“However, we also recommend that a regulation-making power is included to preserve the ability for regulations to add any necessary additional requirements, or provide further details.”
In another industry victory, institutions would only have to publish a high-level summary of their fair conduct compliance programs rather than the full document as per the original COFI bill.
The select committee, chaired by Labour MP Deborah Russell, also tacked on another amendment requiring the government to review the COFI legislation – which would amend the Financial Markets Conduct Act (FMC) – after it has been in force for five years.
Introduced into parliament last December, the COFI bill followed on from regulatory reviews of the NZ banking and insurance industries instigated in the wake of the 2018 Australian Royal Commission into financial services.
“The regime would cover all banks, licensed insurers, and licensed non-bank deposit takers (NBDT), and would apply broadly to relevant services and associated products provided by those institutions,” the report says. “Relevant financial institutions would be required to obtain, or operate under, a licence under the FMC Act.”
Given parliament adjourned last Thursday ahead of the 2020 general election on September 19, the COFI debate will spill over at least into late October.