The government has reserved the right to extend proposed financial institution conduct regulations to the yet-to-be established licensed advisory sector.
In a Cabinet paper backgrounding the new bank and insurer conduct regime proposals released last week, Commerce Minister Kris Faafoi says Financial Advice Providers (FAPs) could ultimately be drawn into the mooted regulatory environment.
“I also consider that the new conduct regime should preserve the possibility of further licence conditions on financial advice providers that align with the new conduct obligations,” Faafoi says in the document.
“This would future-proof the regime to address any problems that might arise if financial advice providers do not conduct themselves in a way that is consistent with the high-level conduct standard expected of banks, insurers and NBDTs [non bank deposit-takers].”
FAPs, the fundamental legal unit in the Financial Services Legislation Amendment Act (FSLAA) regime due to begin transition phase in November, were specifically excluded from the first round of the proposed conduct regulations but Faafoi notes that institutions caught by the new rules would still bear responsibility for consumer outcomes “[r]egardless of the distribution channel”.
He says those institutions operating under the conduct rules would have to train, set conduct standards, and share information with all third-parties that distribute their products, including FAPs.
Financial institutions would also be required to act if they became “aware of [external adviser] activity that might not be in the customer’s interests”.
“Taking action might include reiterating expectations of good conduct, providing further training, restructuring remuneration/incentives to avoid perverse outcomes, reporting the adviser to the FMA or ultimately ceasing to use the adviser to distribute their products,” the Faafoi note says.
Under the proposed law change, introduced in response to a joint-regulatory investigation into banks and insurers last year, financial institutions would be subject to a new conduct licensing regime requiring “high standards of customer treatment” and a ban on sales-based incentives.
However, the proposals fall short of banning or capping product commissions outright.
All NZ banks have agreed to phase out sales-based incentives but Faafoi and regulators called out insurers for failing to respond adequately to the FMA/Reserve Bank of NZ ‘culture and conduct’ findings.
The regulatory impact statement for the proposed new conduct regime says: “While non-regulatory measures by the FMA and RBNZ have achieved some positive changes across banks and some life insurers, not all participants have met the regulators’ expectations, particularly in the life insurance sector.”
In a statement, Faafoi said the “prohibition on volume and value sales targets, plus obligations about how incentives are designed is expected to be effective”.
“We can go further if we need to in future,” he said. “This is consistent with the new financial advice regime, where we consciously made a choice to manage conflicted remuneration rather than ban it.”
Faafoi said the new conduct regulations, to be included via an amendment to the Financial Markets Conduct Act, should in parliament by the end of this year.
The FMA would be “well resourced and set up to ensure the success of this new regime”, he said.
According to the regulatory impact statement, the analysis of the conduct proposals was “prepared under significant time constraints, which did not allow time for more extensive consultation with stakeholders on the development and refinement of options”.
“The broader framework for the conduct regime has been developed in a short timeframe and we expect that there may need to be further refinements through consultation during the legislative process,” the statement says.
