The Financial Markets Authority (FMA) has moved to limit ‘fair conduct’ border disputes between institutions and third-party distributors in new draft guidance released last week.
Banks, insurers and non-bank deposit-takers must ensure product sales through external intermediaries comply with fair conduct programs (FCPs) to be established under the Financial Markets (Conduct of Institutions) Amendment Act, or COFI.
But the FMA says while “principles-based regimes… can produce uncertainty”, firms caught by COFI have the flexibility to create FCPs “without having unintended or unnecessary impacts on the financial institutions themselves or the intermediaries involved in distribution channels”.
“Financial institutions and intermediaries have responsibility for different aspects of the consumer relationship. We do not intend to be prescriptive about this, as what shared responsibility looks like in practice will vary,” the regulator says. “For example, the role of an intermediary that provides financial advice may differ to that of an intermediary that does not provide advice. The key is that financial institutions provide for their FCPs to clearly identify the roles and responsibilities of each party, taking into account the unique factors and characteristics of the products and/or services provided, to ensure fair treatment and outcomes for consumers.”
Institutions should be able to go easier on licensed financial advice providers (FAPs) compared to other distributors, the draft guidance says.
“An institution might determine that in establishing and embedding its FCP it does not need to impose certain policies, processes, systems and controls on FAP intermediaries to provide for a distribution method that operates consistently with the fair conduct principle,” the FMA says.
However, the line between oversight and overstep has already been crossed in the lead-up to COFI with some institutions requiring distributors “to obtain annual external audits or independent assurance reports, which can be costly”.
“This cost may be magnified for intermediaries that distribute products and services of multiple financial institutions,” the draft FMA guide says. “CoFI does not impose any legislative requirement on institutions to require intermediaries to obtain annual external audits or independent assurance reports.”
Furthermore, the regulator says institutional COFI controls should not extend to “constant surveillance” of distributors, monitoring individual advice or sales, or “supervising legal compliance” of intermediary firms.
“We have heard concerns that some financial institutions may be responding to CoFI by imposing compliance measures on intermediaries that go beyond what we think is needed under a risk-based approach. Where financial institutions have moved early with new compliance measures to meet anticipated CoFI requirements, we encourage them to review their settings in light of this guidance and consider whether any adjustments may be appropriate to reflect the level of risk,” the FMA says.
“We think there needs to be a balance between managing risk, and not adding unnecessary cost or reducing product and service choice for consumers.”
Nonetheless, institutions will necessarily demand more transparency from third-party intermediaries under COFI compared to the current regime.
For instance, the draft regulatory guidance says institutions should make efforts to ensure distributors carefully target product sales to appropriate end clients.
“While identification of the intended purpose and likely consumers, requirements and objectives is often undertaken as part of product design, it is still an important input into an institution’s distribution strategy,” the FMA says.
Institutions could supply a raft of information “so that intermediaries have an understanding of how the institution intends to deliver distribution methods that operate consistently with the fair conduct principle”.
Australia introduced somewhat similar rules for a wider range of financial services firms, including fund managers, under the design and distribution obligations (DDO) that took effect in 2021.
Clare Bolingford, FMA head of regulatory delivery, said in a release that institutional arrangements with third-party intermediaries in the COFI regime would need to “clearly assign roles and responsibilities, and include processes for monitoring their effectiveness”.
“Once CoFI is embedded across the industry, the FMA’s monitoring will focus on whether entities are delivering fair outcomes for consumers,” Bolingford said. “Therefore, we encourage financial institutions to work with their intermediaries now, to ensure their fair conduct programme is more than just a checklist for compliance; it needs to be a useful and practical blueprint for implementing and maintaining systems that prioritise fair treatment of all customers.”
The draft FMA guidance is open for consultation until April 14 this year ahead of a licensing process set to start in July with a go-live COFI date slated for early 2025.