The Ministry of Business, Innovation and Employment (MBIE) has laid out five options for treating ‘intermediaries’ under imminent new financial institution conduct legislation including creating separate duties for regulated advisers.
In one of two consultation documents published last week, MBIE is looking to resolve the conflict between the demands of the looming Financial Markets (Conduct of Institutions) Amendment Bill – or COFI – and the just-implemented financial advice regime.
MBIE notes a large degree of overlap between COFI and the Financial Services Legislation Amendment Act (FSLAA), which came into force on March 15.
“FSLAA, however, already places obligations on the conduct of these intermediaries when giving financial advice to retail clients (consumers),” the consultation says. “These obligations are designed to achieve many of the same objectives of the conduct regime.”
The regulatory challenge of “how these two sets of obligations should fit together to achieve the best outcomes for consumers” has prompted MBIE to propose two changes to COFI, currently awaiting its second reading in parliament, namely:
- amend the current definition of “intermediary” in the Bill to capture only persons involved in the sale or distribution of a financial institution’s relevant service or associated products; and,
- narrow the obligations that apply to financial institutions in respect of “intermediaries” to minimise compliance cost and duplication of regulation while still ensuring financial institutions take appropriate responsibility for consumer outcomes.
Among five potential options to clarify responsibilities under COFI, the law could be modified to discriminate between FSLAA-regulated and other intermediaries.
“… this option would impose a more limited range of requirements on financial institutions in relation to intermediaries that are licensed financial advice providers,” the MBIE consultation says.
But while untangling the multiple links in the institution-intermediary chain into workable regulation presents one of the biggest COFI conundrums, MBIE is also consulting on proposed rules covering the entire complex legislation.
“It is our intention to find the right balance between a principles-based and rules-based conduct regime, so the objectives of the regime can be achieved — that there is positive culture shift within financial institutions that improves conduct for the benefit of consumers,” the MBIE consultation says. “In general, this means that we will use prescription where certainty is required to achieve the desired outcome, but a broader principles-based approach, with supporting regulatory guidance, where flexibility is required. This is why in some areas we think regulations are necessary, and in others they are not.”
Regulations, however, would cover many “volume-based” sales incentives, although the government has ruled out any ban on commissions per se.
“We propose that the incentives regulations should apply to all employees, agents and intermediaries of a financial institution or intermediary that are offering, giving, or receiving an incentive based on volume or value based targets,” MBIE says. “The incentives regulations would apply regardless of whether the person who would be otherwise be eligible for the incentive is in a customer-facing role such as sales, or in a managerial or executive position.”
James Hartley – MBIE general manager commerce, consumers and communications – said the consultation responses would feed back into COFI as it enters the final parliamentary phases.
COFI, which passed its first reading last February, has dropped back to 15th on the latest parliament order for the next round.
“We are consulting on regulations covering matters such as requirements for claims handling and complaints processes, and prohibitions of certain types of sales incentives,” Hartley said in a release.
“This will include, for example, banning sales targets for frontline staff at banks. We are also looking into the treatment of intermediaries– for example, brokers selling insurance on behalf of an insurer.”
COFI will create a new ‘fair conduct’ licensing regime for banks, non-banks and insurers, requiring captured institutions to implement new programs and take responsibilities for financial products over the full consumer life-cycle and through all distribution networks. Expected to pass into law by August this year, COFI would come into force in 2023, according to MBIE forecasts, under Financial Markets Authority (FMA) oversight.
The regime could also be extended to other financial firms via provisions in the draft legislation.
Government introduced COFI in the wake of joint FMA and Reserve Bank of NZ (RBNZ) investigations into NZ bank and insurer financial product sales practices. The FMA/RBNZ stings followed the 2018/19 Australian Royal Commission that found widespread malpractice in the financial services industry across the Tasman.