After a more than 12-month delay the much-anticipated Financial Markets (Conduct of Financial Institutions) Amendment Bill – aka COFI – should complete its passage through parliament this week.
Falling just 30 minutes shy of wrapping up all speeches in its third reading last Thursday, COFI has eighth slot on the order paper for the six-hour first parliamentary session of the week due tomorrow (Tuesday, June 28).
Commerce Minister David Clark told parliament the legislation – that establishes a conduct-licensing regime for banks, insurers and non-banks with spill-over compliance duties for some intermediary firms – comes with strong financial penalties “if a financial institution breaches one of its obligations under the bill”.
“The Financial Markets Authority, of course—as members here know—is a risk-based regulator and will take a proportionate approach to guiding the sector and regulating compliance. The FMA, I am informed, has already started engaging with financial institutions to ensure they’re prepared for the new regime and for licensing applications to open in mid-2023,” Clark said.
“We’ll also be introducing some regulations to support the bill. The Government has already agreed that it is essential to ban incentives that are based on volume or value targets, such as an overseas trip as a reward for selling a certain number or value of insurance policies. These kinds of incentives create a strong potential for conflict of interest, particularly as a person nears their sales target.”
However, as flagged in March, the final COFI version tones down some of the more onerous compliance rules that as originally drafted would’ve likely triggered institutional incursions into third-party advisory firms.
Under a supplementary order paper (SOP) tabled for the house committee and third-reading stages, institutions will be responsible for oversight of the training and supervision of employees only “rather than intermediaries and agents as well”.
“In addition, the requirement for certain persons to follow procedures or processes to support the financial institution’s compliance with the fair conduct principle under new section… no longer applies in relation to intermediaries (but continues to apply to agents and employees),” the SOP says.
“… This Supplementary Order Paper also now requires a financial institution to have regard to the legal obligations that its intermediaries have. In particular, if an intermediary is a financial advice provider… [another part of the law] already sets out requirements with a view to ensuring the quality of financial advice…”
Nonetheless, government retains the right to impose further regulations on intermediaries under the COFI legislation, including banning commissions and other remuneration practices.
As well, the SOP “clarifies that regulations can prescribe requirements relating to procedures or processes that intermediaries or agents must follow to support the financial institution’s compliance with the fair conduct principle”.
COFI emerged out of a dual-regulator investigation of the NZ banking and insurance sectors in 2018/19 that were in turn inspired by findings of the earlier Australian Royal Commission into financial services.
While the Reserve Bank of NZ and FMA probes found no systemic issues, the resulting reports recommended a tougher regulatory oversight regime for the sectors.
COFI first entered parliament late in 2019 before a series of COVID-related and other distractions delayed its passage through the system.
Andrew Bayly, National finance spokesperson, railed against COFI last week, labeling it “a very damaging, very poor piece of legislation”.
“And one of the big things we’re going to have to do when we come into power, the first thing we’re going to have to do is learn to support our financial sector,” Bayly said. “We’re going to have to declutter this stuff so that people, banks, and insurance companies are accountable, to make sure we’ve got the right framework, but what we’re not going to do is overladen them with a whole lot of compliance just for the hell of it so the Minister can put a new piece of legislation through the House and look good. It’s not looking good, it’s a waste of time, and we’re going to oppose it.”
Despite the opposition of National and Act, the government has the numbers to serve up COFI with the law expected to take full force in 2025.