“These are not rules,” the Financial Markets Authority (FMA) new draft guide on ‘outcomes-focused regulation’ says. “They do not change firms’ obligations. They provide a focus for compliance and business efforts, supported by our existing legislative framework. Delivering these outcomes is the most effective way for good conduct to be demonstrated.”
Nevertheless, the NZ financial services industry will need to carefully scrutinise the seven ‘fair outcomes’ expectations laid out in the FMA proposed guidance released last week.
Up for a more than three-month consultation period, the non-rules will set the regulatory tone over coming years under chief executive, Samantha Barrass.
“We all know what is fair when we see it, but experience tells us not all providers adequately take this into account when they design products and services or implement rules and regulations,” Barrass says in the guide. “We want firms to adopt a demonstrable focus on results. Compliance needs to start with the intent and purpose of rules and a focus on what shifts the dial for consumers and markets.”
The guide fleshes out how the FMA plans to implement the seven outcomes, which include ensuring consumers have access to “appropriate” products and “useful information” while also incorporating the ‘value-for-money’ theme first flagged in 2020.
“Prioritising outcomes also means we will more easily be able to identify and challenge approaches that don’t support fairness,” the draft guide says.
“This will be an important part of our engagement model and the results we see in the market will alert us to where we need to have robust conversations about appropriate practices.”
For instance, the regulatory guide highlights investment product commissions for attention in the ‘value-for-money’ section.
According to the draft document, the 2022 FMA value-for-money review of investment and KiwiSaver managers “found a prevalence of trail commission costs being embedded within (and thereby increasing) fund fees, typically without an ongoing advice service (or no advice service) to benefit the consumer and with no disclosure of that practice by the fund manager”.
Liam Mason, FMA general counsel, said in a statement that while the regulator would always take a “risk-based” approaching to policing the market, the outcomes model market a significant change in style.
“We believe that beginning our conversations with firms based on the outcomes we want to see, will help prevent harm in the first place,” Mason said. “As we become a more outcomes focused regulator, this will require a shift in culture and mindset from us and firms to think about the results we want and have a shared interest in delivering for New Zealanders.”
And while the seven FMA outcomes are not rules, they might yet become entrenched in law.
“Whether or not fair outcomes are being achieved will also inform our conversations with the government and other regulators if we identify places where law reform may be required,” the draft guide says.
Consultation on the outcomes proposals is open until March 1 next year.