There is no escape: legislation, regulation, technologisation and bureaucracitisation will sweep through every nook and cranny of the NZ financial services industry this year, an expert panel warned last week.
The panel of lawyers and specialist financial technology consultants – assembled by DLA Piper and Mosaic Financial Services Infrastructure – highlighted the looming changes due to bring end-to-end disruption to the industry in 2019.
All sectors from financial advice through to custody will have to adapt quickly to the changing environment – various experts argued – as the gathering forces of new laws, government working groups, regulatory expansion and technological disruption coalesce into an intense high pressure system.
The Mosaic/DLA Piper financial services ‘heatmap’ for the year ahead covers a dozen items including two major pending laws: the Financial Services Legislation Amendment Bill (FSLAB) and the new trusts bill.
Elsewhere, the Tax Working Group (TWG), Reserve Bank of NZ (RBNZ) review and the Financial Markets Authority (FMA) rethink of custody licensing promise to further shake-up industry complacence.
And the FMA/RBNZ ‘culture and conduct’ reviews of the local banking and insurance sectors will trigger – as yet unspecified – legal reforms with the influence of the Australian Royal Commission (RC) into financial services also set to waft across the Tasman.
Tracey Cross, Auckland-based DLA Piper partner, told the Wellington audience while the NZ regulatory investigations did not uncover the “systemic issues” thrown up by the RC, fundamental change was in the offing.
“There’s a new world,” Cross said. “[Financial services] firms now have to think about long-term customer objectives and not just shareholder returns.”
She said issues such as product design and suitability will come to the fore as well as tracking customer outcomes over the long term.
For example, Cross said the RBNZ/FMA insurance review calling for providers to assume responsibility for how their products are sold through third-party advisers was “a wake-up call for insurers”.
Despite the harsh report, she said some insurance companies did not expect the government to follow through on major reforms (which include a banning or drastic scale-back of commissions).
“This won’t blow over,” Cross said. “MBIE [the Ministry of Business, Innovation and Employment] and government are calling the shots.”
But as front-end suppliers and advisers brace for the onslaught of FSLAB and regulatory review reforms due this year, other back-end services are also due for a revamp, according to DLA Piper Wellington principal, Alasdair McBeth.
McBeth said, for instance, custodian licensing would likely come into force later this year as the FMA completes its long-running review of the sector. In 2017, the International Monetary Fund (IMF) singled out regulatory gaps in the NZ custody and wholesale funds management markets as areas of concern.
According to McBeth, the wholesale fund market appears safe from any changes but the FMA is on track to licence custodians later this year. However, he said it wasn’t yet clear if the custody-licensing regime would be limited to products governed under the Financial Markets Conduct Act (FMC).
He also said the TWG final report (due out this Thursday) would likely recommend Australasian shares fall under a broad capital gains tax regime – lumped with global equities under a possibly-reduced fair dividend rate (FDR) system.
Furthermore, the TWG report could tweak the portfolio investment entity (PIE) rules, carving out KiwiSaver as a tax-preferred sector, McBeth said.
However, he said the TWG proposals would face considerable political and technical hurdles making the government’s targeted introduction of enabling legislation this year unlikely.
Somewhat disappointingly, McBeth said the backlog of local legislation and regulation had seen NZ miss the February launch of the Asia-Pacific Region Funds Passport (ARFP) regime, which will enable fund providers in the pact to offer products across jurisdictions. NZ probably won’t have ARFP rules in place until next year.
As the regulatory and compliance burdens mount, NZ financial services providers would inevitably look to technology to ease the pressure, Mosiac founder, Myles Allan, told the crowd.
Allan said the technology aimed at curing regulation headaches (or ‘regtech’) was already here but NZ firms would have to find “right size” solutions that fit their operating models.
“Compliance costs will just keep going up if you keep doing the same thing,” he said. “For example, doing FMA regulatory reporting on a spreadsheet is not sustainable.”
Cloud computing, data analytics, artificial intelligence and appropriate application programming interface (APIs) solutions can now allow financial services businesses to manage customer needs and internal risks in almost real-time, Allan said.