The regulator has hosed down concerns that third-party distributors would face extra legal burdens under the new Financial Markets (Conduct of Institutions) Amendment Act 2022, or COFI, regime.
In its feedback on the ‘intermediated distribution’ COFI consultation process, published last week, the Financial Markets Authority (FMA) says several submissions argued draft guidance referring to ‘shared responsibility’ “would create confusion and possibly imply a legal duty on intermediaries where there is not one”.
“References to ‘shared’ and ‘shared responsibility’ are not intended to imply any additional legal duties on parties beyond what is already imposed under CoFI,” the FMA says. “Rather, they are included to acknowledge that multiple parties are involved in intermediated distribution and the dual CoFI and financial advice regimes, which create different but related responsibilities relating to the fair treatment of consumers.
“… our focus is more on collaboration between financial institutions and intermediaries, where it is appropriate and necessary. We have clarified the guidance to acknowledge that collaboration may not be necessary in all remediations, and that the extent of collaboration may differ from one situation to the next.”
David Ireland, Dentons Kensington Swan partner, said the FMA clarification, embedded in the COFI third-party distributor final guidance released last week, marks a win for the industry.
“It’s clear the FMA has listened to industry concerns,” Ireland said. “And it shows consultation can be effective and why it’s worth making submissions.”
As well as clarifying the ‘shared responsibility’ nexus between COFI-regulated entities and external intermediaries, he said the final FMA guidance confirms financial institutions can rely on a “higher assurance” when dealing with peers.
The draft guide already confirmed that institutions could expect financial advice providers (FAPs) to require a lower level of oversight than non-licensed intermediaries.
“They’ve also expanded the examples to include a few more non-standard situations,” Ireland said, to help the industry better-understand the regulatory approach to third-party distribution under COFI.
In general, he said the fine-tuned FMA guidance should reduce potential conflict between intermediaries and COFI-compliant institutions.
“The final guidance isn’t a silver bullet but it is more nuanced,” Ireland said. “It reinforces that financial institutions are not compelled to go to the nth degree to look under the bonnet of intermediary firms.”
But the conduct regime, due to take full effect in 2025, has created a two-tiered financial product distribution system where non-COFI businesses – such as non-bank fund managers and KiwiSaver providers – may be subject to different regulatory treatment while offering the same services.
“In principle, the same conduct themes might apply beyond financial institutions – for KiwiSaver, in particular,” Ireland said. “If at some point the government decides to broaden the COFI regime it would be easy to just change the definition of ‘financial institution’ in the legislation.”