The Financial Markets Authority (FMA) has knocked back industry calls to exclude the need to justify fees as part of ‘good conduct’ standards.
In its revised ‘Guide to the FMA’s View of Conduct’ issued last week, the regulator says a number of submissions on the draft document said requiring firms to tell consumers why their fees were ‘reasonable’ was unhelpful, a regulatory over-reach, or best left to market forces.
“Providers who hold the views expressed above are of course free to share those views with their customers,” the FMA says. “But we think that may be a more uncomfortable discussion to have with a customer than it is to express in a consultation submission.”
Liam Mason, FMA director regulation, said the revised guide does clarify that – with the exception of the ‘not unreasonable’ test in KiwiSaver legislation – there are no legal restraints on financial product fees.
“But we think firms need to have a conversation with consumers about why their fees are reasonable,” Mason said. “If not, then that’s telling us something interesting about the provider.”
However, the FMA says the guide “does not present a view on what is a reasonable fee to charge”, rather it focuses on what providers should disclose about fees.
“Specifically, the guide states that providers should be able to explain why their fees and costs are reasonable, including the reasonableness of how they are calculated,” the FMA says. “We think this is just common sense.”
Mason said another common theme emerging from the 29 submissions on the draft guide highlighted provider concerns that taking customer needs into account (including considering alternative products) would stray into financial advice.
For example, the Westpac submission states: “The Guide should not operate to imply that product providers have a duty to provide financial advice to customers.
“Likewise, the Guide should not seek to imply a duty on those providing financial adviser services to assess and speak
to the full suite of products from across the market when advising customers,” the Westpac submission says.
But, according to Mason, the FMA guide simply calls for providers to assess product suitability at the design stage rather than in each client transaction.
He said, for example, a number of financial products issued offshore and domestically – such as complex derivatives, payment protection insurance, and the infamous Diversified Yield and Regular Income funds offered by ANZ’s then-subsidiary ING – were not aligned with retail investor needs.
“It’s responsible for providers to think about the suitability of products before they issue them to the retail market,” Mason said.
While the FMA held its ground on core issues, the revised guide does make concessions to industry feedback on clarity of purpose and defining its borders.
For example, the FMA explicitly carves out wholesale investors from the guide’s ambit.
“We agree that obligations owed to wholesale customers may be different to those owed to retail customers, and have updated the guide to reflect this,” the guide says. “But we have also noted that wholesale customers have the same right to expect good conduct from their providers as retail customers.”
Furthermore, the FMA says the new guide more clearly states it “does not create, replace, or even supplement, existing legal obligations”.
Mason said the conduct guide was not intended to impose new “guidelines or soft rules” but as a framework for industry players to interpret the regulator’s approach to monitoring their behaviour.
“This not about additional processes but a reflection of how things actually work,” he said. “You can’t easily respond to this with paperwork.”