FMA releases final conduct guide

A Guide to the FMA's view of Conduct (the Guide) identifies a set of customer-focused expectations which leaders of licensed financial service providers should reflect in their governance and compliance processes and behaviour.

Overview of the Guide

As we outlined in our earlier Brief Counsel, the Guide sets out what the FMA will focus on when determining whether financial service providers are demonstrating good conduct and satisfying their governance and management responsibilities.

The FMA is using its influence to seek a step change in how financial service providers discharge their legal obligations and interact with customers.  The FMA acknowledges the Guide goes beyond mere compliance.

Guidance of this type is helpful for the market and an effective way for the FMA to achieve one of its key purposes – to promote fair, efficient and transparent financial markets.

The Guide summarises the FMA's expectations under five key categories.

  • Capability – providers are expected to have the expertise, customer knowledge, internal training programmes and assessment processes so they provide suitable services or products that meet customer needs and satisfy their professional standards of care.
  • Conflicts – business strategies and incentives are expected to be aligned with customers' interests.  Any incentives or arrangements with related parties are expected to be transparent.
  • Culture – clear standards of good behaviour are expected to be imposed on staff to ensure that the provider acts in the customer's interests, treats customers honestly and fairly, and fulfils its duties and obligations.
  • Controls – checks should be in place to support good conduct and to identify and address poor conduct, including complaints, dispute resolution and customer feedback gathering processes.
  • Communication – providers are expected to listen to what customers want, ensure customers are able to easily understand their services or products, and confirm their fees are reasonable.

Chapman Tripp was one of 29 organisations – and the only law firm – which provided feedback on the Guide.  Our submission can be found here

Who should read the Guide?

The Guide will assist directors, senior managers and compliance officers within financial service providers to demonstrate their businesses meet the FMA's expectations in relation to conduct.

The Guide reflects a compliance step change

Financial service providers will need to demonstrate a range of additional customer-focused behaviours if they are to meet the FMA's expectations. 

The incentives for doing so are better overall customer outcomes, improved regulatory compliance, more favourable licence renewals and reviews, and the prospect of greater understanding if compliance issues arise.

The FMA emphasises that the Guide is not a checklist - indeed its goal is to elevate providers' attention above mere compliance or box-ticking, to establishing and maintaining behaviours that focus on delivering good customer outcomes.

With this in mind, licensed or authorised providers should consider taking steps to ensure that they can demonstrate at least the following:

  • Alignment of incentives with customer interests – The FMA expects providers to be able to demonstrate the alignment of staff incentives and related party compensation with good customer outcomes.  For financial advisers and sales teams, this might involve verifying and recording the reasons why incentives and compensation are consistent with good customer outcomes.
  • Reasonableness of fees – The FMA expects providers to disclose how fees and costs are calculated and to explain why they believe the cost and calculation methods are reasonable for all products.  This expectation appears to extend to all financial products and services the current rule that KiwiSaver scheme providers must set reasonable fees. 
  • Top down leadership of honesty, fairness, integrity and compliance The FMA expects leaders to promote a culture which encourages good conduct, and in particular a customer-centric focus.  A Code of Conduct that sets standards of behaviour for the business, and processes to recognise good conduct and respond to breaches, would assist in meeting this expectation. 
  • Suitable training processes The FMA expects providers to demonstrate that they are providing internal training which reflects the need for good customer outcomes and compliance. To this end, it may be helpful to be able to evidence training assessment processes which evaluate current and future staff training against the objectives of the Guide.   
  • Suitable dispute resolution processes – The FMA expects providers to demonstrate that they have a transparent and effective complaint and dispute resolution process that shows lessons learned are integrated into business practices.  Providers may benefit if they can provide examples of where changes have arisen from complaints and their dispute resolution processes have delivered good outcomes for customers.
  • Suitable compliance assurance programme – Providers could meet the FMA's control expectations through a compliance assurance programme that challenges and tests the effectiveness of controls, and the adequacy of governance and management information, to ensure the business meets its regulatory obligations.  Standards for such a programme are set out in the licensing guide for managed investment schemes.
  • Clear internal and external communication processes – The FMA expects providers to communicate with customers in plain language, pro-actively and often, especially if something goes wrong.  Internal communications from directors to front-line staff are also expected to focus on customer outcomes.  Providers should ensure that their communications programme and principles are understood throughout the business.
  • Customer feedback is sought – The FMA expects providers to be able to show – potentially via direct customer feedback – how they know good conduct is occurring and customer needs are being met.  The FMA mentions customer satisfaction surveys, call-backs, and mystery shopping as possible tools to determine whether customer outcomes are being achieved.
  • Performance is assessed The FMA expects providers to review product performance to ensure the return is appropriate for the risks involved.  It may be desirable for an investment committee to undertake and record an assessment of a product's potential performance against the risks involved when evaluating a product for market and to undertake regular product review sessions.  
  • Desirable to conduct due diligence of all customer communications – The FMA expects providers to ensure that disclosure to customers is accurate, clear, concise, effective and timely.  Providers should also have a clear plan for when communications go wrong, and ensure that customers understand the range of expected outcomes of a particular product.  Providers might demonstrate this by ensuring that they conduct due diligence on all customer communications (including websites, advertisements, telephone and other channels).
  • A statement summarising conduct compliance steps – The FMA expects providers to demonstrate that they are delivering good customer outcomes through the recommendations in the Guide.  We recommend that providers record the steps they have taken, and outcomes they have delivered, which align with the FMA's expectations. 

Conclusion

While the FMA does not see the Guide as a checklist or manual, it does provide a steer on the questions that directors and senior managers of providers should be asking themselves when assessing if they can demonstrate that their practices align with the FMA's expectations.

The Guide contains a list of specific questions which cover far more than the general topics discussed above and enables leaders to assess their preparedness for an FMCA review. 

Providers who ensure that their governance structures, control mechanisms and organisational culture can be shown to align with the Guide, will be well prepared for the FMA's proposed visits and will likely be better treated if breaches occur. 

How we can help

Our Financial Services Team has assisted our clients to transition to the FMCA, and in so doing, has built the compliance frameworks, governance plans, product disclosure and due diligence systems that are expected by the FMA in the Guide.

The FMA's expectations in the Guide go beyond mere compliance and process changes, and instead ask providers to focus on changing expected behaviour.  We can help you work out how best to demonstrate to the FMA and your customers that your business is listening and responding to the FMA's messages.

Our thanks to Tim Williams and Brendon Orr for writing this Brief Counsel.

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Related topics: Financial Markets Authority; Financial Markets Conduct legislation

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