The government’s latest foray into financial services regulation looks set for a rough ride through parliament as opposition parties line up against the proposed ‘conduct’ legislation.
Despite passing its first reading last week on the back of a coalition majority vote, opposition National Party members slammed the Financial Markets (Conduct of Institutions) Amendment Bill as unworkable and unnecessary during the debate.
By contrast, last year the Financial Services Legislation Amendment Act (FSLAA) passed into law with just one dissenting vote (Act Party MP David Seymour).
Under the new bill, financial institutions – covering banks, insurers and non-bank deposit-takers – will be subject to a new ‘fair conduct principle’ with a long list of associated duties as well as direct licensing and oversight from the Financial Markets Authority (FMA) for the first time.
Furthermore, the conduct legislation – to be enacted via changes to the Financial Markets Conduct Act (FMC) – will trigger regulations banning “incentives based on volume and value targets”, Commerce Minister Kris Faafoi told parliament last week.
“… and this prohibition applies not just to licensed entities but also to all intermediaries throughout the supply chain,” Faafoi said. “It’s also about any and all incentives, whether monetary, such as commissions, bonuses, or other non-monetary rewards like leader boards or trips abroad.”
While the draft law explicitly carves out “financial advice providers or other financial institutions acting as intermediaries” from the fair conduct compliance regime, it also gives the regulator plenty of rope to haul them back in.
The bill digest says: “… the FMA can impose conditions on a financial advice provider’s license relating to its involvement in the provision of relevant services or associated products regardless of whether the provider gives financial advice.
“Further, in relation to financial institutions acting as intermediaries, new section 446J(1)(b) provides that the intermediary’s fair conduct programme must cover its involvement in the provision of the main financial institution’s relevant services or associated products.”
The government also has reserved to right to bring other entities such as fund managers or independent distribution firms into the conduct regime at a later date.
In his parliamentary speech last week, Faafoi acknowledged the industry has some genuine gripes about the conduct proposals.
“Officials have recently consulted with financial institutions about how the bill will work in practice, and I have heard concerns that industry have raised around certain aspects of the bill; for instance, how the framework of the bill works in relation to intermediaries, the requirements related to conduct programmes, and the timing for implementation of the changes,” he said, “and we will be watching the select committee process very closely.”
National MP, Brett Hudson, was first in the opposition queue to critique the conduct bill, describing it as a “regulation-making power” grab.
Hudson, and other National MPs, argued the conduct proposal doubled up on existing FSLAA and FMC rules that could easily be tweaked to achieve the same aims.
National would be “constructive on the select committee, but we will not support the bill in the form it’s currently”, he said.
Jonathan Young, another National MP, cited an analysis by law firm Chapman Tripp that notes: “Care will need to be taken to ensure that the further licensing obligations under the FMCA are streamlined, the licensors are co-ordinated and the obligations are consistent and not duplicated.”
The Chapman Tripp opinion says the mooted conduct law would impose “significant costs… on banks, insurers [and non-bank deposit takers] and their intermediaries selling products to retail customers.
“Compliance costs are expected to be moderate to high,” the law firm says, while government and the FMA would face “significant” administrative costs under the proposed legislation.
Submissions on the conduct bill remain open until March 26 ahead of the Finance and Expenditure select committee process.
But, if the FSLAA legislative journey is any guide, the government may struggle to push the law through before the September 20 general election:
On the same day the conduct bill passed muster, parliament sent another less-contentious piece of law-making off to select committee. The Financial Markets Infrastructures Bill (FMI) grants a raft of new regulatory powers to the FMA and the Reserve Bank of NZ (RBNZ) over certain ‘systemically important’ pieces of the country’s finance architecture.
If passed into law, the FMI could bring a handful of businesses into a much stricter regulatory regime. Government has earmarked five services as likely systemically important, including two RBNZ operations – the Exchange Settlement Account System (ESAS) and NZClear.
Other high-priority services on the FMI list include:
- NZX settlement and clearing system, NZCDC;
- CLS – global currency settlement platform; and,
- the Payments NZ-operated Settlement Before Interchange (SBI) retail payment network.
The government also identified four more possible FMI candidates, comprising:
- LCH Clearnet – London-based interest rate swap clearing house;
- ASX Clear – a futures settlement service;
- High Value Clearing System (HVCS) – the Payments NZ real time clearing set of rules; and,
- DTCC Singapore – an over-the-counter derivatives data house owned by US-headquartered Depository Trust & Clearing Corporation.
In the perfunctory debate, most speakers supported the FMI while admitting to limited knowledge of the underlying systems at stake. As well as canvassing grammatical issues such as whether ‘infrastructure’ can be pluralised, the FMI debate ended on this note from Labour MP, Greg O’Connor.
“Just to give an example of what happens if there is no regulation—of course, we’ve got the block chain, bitcoin, which is actually happening, which is completely unregulated,” O’Connor said. “We are continually hearing of problems in that industry, if you will call it that, which are a net result of absolutely no regulation; the jungle rules.”