The government could subject a wide range of financial institutions including KiwiSaver providers to proposed conduct regulations that emerged last week in response to recent bank and life insurer investigations.
An options paper released by the Ministry of Business, Innovation and Employment (MBIE) late in the week lays out a series of measures designed to counteract problems identified by joint regulatory probes last year into sales and conduct practices within NZ banks and insurers.
“In the first instance we propose applying this package to banks and insurers in their dealings with retail customers,” the MBIE paper says. “We are considering the case for rolling out this package of options to all those financial institutions that offer similar services to banks and insurers.”
According to the MBIE paper, the new rules could extend to all KiwiSaver firms, managed investment schemes, non-bank deposit takers, other lenders and discretionary investment management service (DIMS) providers.
The MBIE preferred regulatory options set out a number of new conduct duties for financial institutions that directors and managers could be personally liable for.
Both in-house and third-party distributors would fall under the proposed remuneration rules in the government’s preferred package that includes a well-signaled ban on ‘soft commissions and other “target-based remuneration and incentives”,
However, the favoured approach stops short of capping insurance product commission levels as in Australia.
The government has also ruled out “a total ban on commissions at this time because there is significant risk that this will reduce access to financial advice for consumers, drive all sales in-house and reduce competition in the market”.
“A ban on commissions would be likely to make financial advice more expensive and difficult to obtain for the average consumer, as it would probably require consumers to pay upfront fees to obtain advice,” the MBIE paper says.
Furthermore, the government favours imposing higher insurance claim-handling duties, granting new enforcement powers to the Financial Markets Authority (FMA) and sheeting product suitability responsibilities to both manufacturers and distributors.
For example, the proposals would require manufacturers to look-through all intermediary channels to “ensure that the sales of its products are likely to lead to good customer outcomes”.
Meanwhile, distributors would have to “identify the intended audience for a product and a requirement for distributors to have regard to the intended audience when placing the product”, the options paper says.
However, the MBIE discussion document says the “process of a distributor determining whether a particular customer fell within the target audience and then choosing whether to sell the product to that customer may constitute financial advice”.
“It is possible that this option could therefore result in all sales of financial products being deemed to be financial advice,” the paper says. “This could significantly increase the compliance cost faced by those distributors who do not currently provide financial advice when they sell a product.”
Elsewhere, the MBIE paper says financial industry organisations are unlikely to play a formal role in governing any new regulations given the conduct problems have occurred “despite industry bodies having codes of conduct for their members”.
“This implies that to date, industry bodies have not been sufficiently effective at self-regulating their members’ conduct,” the paper says. “… we do not currently think that expanding and formalising the role of industry bodies will solve the issues raised.”
Commerce Minister Kris Faafoi says in the paper that the government options to reform the financial institutions conduct underpin the construction of a “productive, sustainable economy that works for everyone and is fit for the 21st Century”.
“Recently it has come to light that our financial institutions have not been sufficiently focused on benefitting those individuals who use their services and managing the risk of misconduct within their business,” Faafoi says. “This is apparent in both the bank and life insurer conduct and culture reviews undertaken here by the Financial Markets Authority and the Reserve Bank, as well as the Australian Royal Commission [RC] into Misconduct in the Banking, Superannuation and Financial Service Industry.”
The FMA and the Reserve Bank of NZ (RBNZ) launched joint investigations into the local banking and life insurance sectors last year following revelations emerging out of the RC.
“The conduct and culture reviews undertaken by the FMA and RBNZ have identified some similar problems in New Zealand, albeit not as widespread as those in Australia,” the paper says.
Banks have already responded to the NZ regulators’ final industry report while life insurers have until the end of June to reveal how they plan to address the FMA and RBNZ concerns.
Submissions on the latest MBIE options paper are due on either May 31 or June 7 depending on which of the multiple dates published on the website ultimately proves accurate.