Banks, insurers and non-bank deposit takers will be subject to a licensing regime intended to drive better consumer outcomes and administered by the Financial Markets Authority (FMA).
This is the outcome from the reviews by the FMA and the Reserve Bank of New Zealand last year into the insurance and finance sectors, inquiries which were sparked by the Hayne Royal Commission in Australia.
Legislation to implement the new system will be introduced later this year. We look at the proposed changes.
Licensed institutions will be required to implement effective policies, processes, systems and controls to meet a “fair treatment standard” – e.g., to pay due regard to the customer’s needs and interests and to treat the customer fairly. These will be specified by regulation.
The regime will:
- outline the obligations on the licensee in relation to remuneration and any other sales incentives, and how the risks created by those incentives will be managed
- prohibit sales incentives based on volume or value targets – e.g., soft commissions such as overseas trips, bonuses for selling a certain number of products, leader boards and sales-based performance management. This prohibition will apply to banks, insurers, non-bank deposit takers and their intermediaries
- make licensees accountable for sales to consumers by contracted intermediaries who are not financial advisers – e.g., car dealers, retailers selling add-on finance and insurance, and travel agents or airlines selling travel insurance.
Breaches will attract fines of up to $1m for individuals and $5m for companies or the consideration for any relevant transaction, or three times the amount of any gain made or loss avoided – whichever is the largest. This is the penalty structure applying under the Financial Markets Conduct Act, and is substantially lower than the penalties the Australian banks face under the Banking Executive Accountability Regime (BEAR).
The Regulatory Impact Statement (RIS) prepared by the Ministry for Business, Innovation and Employment (MBIE) notes that the cost impost for regulated entities will be moderate to high, depending upon their current level of compliance, and that the administrative and enforcement costs to the Government and the FMA will be significant.
Chapman Tripp comment
In our commentary on the final report of the Hayne Royal Commission, we urged the Government to avoid over-reach and advance with care because an over-prescriptive approach might suffocate dynamism and competition to the detriment of consumers.
Our preliminary view is that an appropriate balance has been achieved. It is clear from the RIS that MBIE was alert to the danger and has sought, through the policy design, to minimise or mitigate any unintended or perverse impacts.
For example, it concludes that:
- the risk of reduced access to financial advice will be largely avoided because the “most intrusive regulatory options” (i.e., banning or capping commissions) are not being implemented, and
- although the costs which might be passed through to the public may be “moderately large in aggregate”, they will be spread across a large number of consumers so will be “immaterial at the individual customer level”.
That said, these new arrangements will land in an already busy arena, with extensive and increasing requirements across a broad range of financial products and services, and their providers. The Bill will be welcomed to the extent it addresses gaps and shortcomings, but it will exacerbate the already considerable challenge of bringing all of these policy streams together into a single coherent framework.
Costs and benefits will depend on how well these various responsibilities speak to each other and whether they encourage rather than stifle the market’s ability to respond to shifting customer needs and preferences. Once bedded in, they will require a pivoting of government resource from making laws to enforcing them.
The market will not be able to make a firm judgement on these issues, however, until the detail of the Bill is available. There will then be an opportunity to seek changes through the select committee submissions process.