The Government has indicated that it will have regard to the findings of the Hayne Royal Commission as it develops legislation to respond to the reviews last year by the Financial Markets Authority (FMA) and the Reserve Bank of New Zealand (RBNZ) into the conduct and culture of our banking and insurance industries.
But the time and resourcing demanded by the prescription laid out in the Hayne final report may suffocate dynamism and competition in the financial sector to the detriment of consumers.
We urge the Government to avoid over-reach, advance with care, and ensure an appropriate balance between consumer protection and industry innovation.
The New Zealand context
Even before it was concluded, the Hayne Royal Commission had triggered a response in New Zealand in the form of the reviews conducted by the RBNZ and the FMA. The Government has already committed to fast-track consumer protection measures across the financial sector in response to these findings, and will release a consultation document in May.
Any outstanding recommendations from Hayne can be incorporated into this legislative programme as it is developed. But it is important that the Government maintain a sense of perspective as it contemplates how far to follow Australia.
Not only has New Zealand just completed a once-in-a-generation rewrite of capital markets law in the Financial Markets Conduct Act 2013, but we also have a number of work streams currently in play that pick up many of the issues identified by Hayne. These include:
the Financial Services Legislation Amendment Bill and the accompanying disclosure regulations for advice to retail clients
the insurance contract law review
the RBNZ ‘Phase 2’ review
the planned amendments to the Credit Contracts and Consumer Finance Act, now being drafted, following the recent consumer finance review
the proposal to increase the protections available to whistle blowers under the Protected Disclosures Act 2000
the Unfair Commercial Practices review
Capital Markets 2029, the review initiated by the FMA and NZX and led by Martin Stearne, and
the review of Section 36 of the Commerce Act, relating to the misuse of market power.
Chapman Tripp has prepared a table to enable navigation of the 76 Hayne recommendations, together with our assessment of whether they are likely to be imported to New Zealand, the legislative or reform platform under which they might be considered, and their impact if they were to become law. We would be happy present this to you on request.
Response must be proportionate
The Hayne prescription is built around four broad themes:
- the need for a strong organisational focus on governance and culture, with internal reviews conducted “as often as reasonably necessary” and the regulator to run a supervisory programme to assist entities to manage their conduct risk
- remuneration structures and arrangements (read commission payments) to be included in the regulator’s supervision role
- boards to be more prepared to challenge management and to ensure they have the right information, and
- compulsory registration, reference checking and information sharing to ensure advisers and brokers who have engaged in misconduct are culled from practice.
These are each unexceptionable but, as applied under intense political heat by highly profitable and well-resourced organisations in the much larger Australian market, will soak up a lot of time and resource – potentially stifling competition by setting up barriers to entry and creating a highly conservative and risk-averse culture.
To suggest that you can at once have safety and dynamism in full measure is not wishful thinking, it is a fallacy – an observation underscored by the fact that the word “culture” is used 304 times in the Hayne Final Report, “competition” only about 20 times, and the possibility that these regulations will raise the bar for new entrants is not discussed at all.
Australia and New Zealand – similarities and differences
The high level of Australian ownership in our banking and insurance sectors and the integration achieved under the CER harmonisation project mean the conduit for influence between our two economies is exceptionally strong and wide.
But in this case, our differences are as important as our similarities and the problems laid bare by the Hayne Royal Commission simply do not exist to anywhere near the same extent here, as shown in the FMA/Reserve Bank reviews and the surveys underlying them.
Australia has spent 36 of the past 60 months conducting and considering financial system inquiries.
The Hayne Royal Commission was appointed barely two years after the Australian Government had responded to the Financial System Inquiry, which took more than a year, attracted 6,500 submissions, and culminated in a 350 page final report (named the Murray report after its chair).
Hayne took over 14 months, attracted 10,323 submissions, unearthed criminal offending at the highest levels, and produced a 530 page report – so a bigger effort all round, and reflective of deep-seated issues in the Australian financial sector.
The scandals brought to public attention during the Hayne hearings and the resultant loss of public confidence are holding the politicians’ feet to the fire, particularly as Australia heads to the polls this year. However, the arc of regulation, even in Australia, is not necessarily set.
While the Labour Party remains committed to full implementation of the Hayne Report (other than as relates to mortgage brokers’ trail commissions), there are recent media reports from Australia that the Coalition is beginning to wobble in places. And in recent days the chair of the predecessor Financial System Inquiry expressed concern that the growth of black letter law implied from the Hayne recommendations might “return banking to the bad old days” and harm the economy.
The RBNZ/FMA reviews, although they found definite scope for improvement, did not uncover serious, sustained and deliberate misconduct. It is also worth noting that the FMA is held in much higher regard than its sister organisation in Australia – the Australian Securities and Investments Commission (ASIC).
So poor has ASIC’s performance been that Hayne felt the need to remind it that financial services entities “are not ASIC’s clients” and to give it a three year limit to turn itself around or face dismemberment.
The FMA by contrast rated well in a survey of market participants conducted last year by the New Zealand Initiative – Who Guards the Guards? Regulatory Governance in New Zealand.
Broadening of the ‘BEAR’ accountability regime
A recurring theme in the Hayne report is the expansion of the recently implemented Banking Executive Accountability Regime (BEAR), both in scope – to include non-bank financial institutions, superannuation providers, insurers and even (albeit by proxy) regulators – and in extent; now to encompass cradle-to-grave executive responsibility for product design, delivery, maintenance.
Chapman Tripp comments
The Hayne solution is not costless. It will require a substantial resource commitment from its targets that will – inevitably – bear upon the dynamics of the market, potentially reducing its competitiveness and capacity to innovate.
These are not effects that should be incurred lightly or unnecessarily.
New Zealand laws still, as a generalisation, operate from the starting point that people are best placed to look after their own affairs so long as they are not lied to (fair dealing) and have genuine choice (competition law).
We urge our law-makers: look at our environment and require a decent standard of proof that the benefits of a new restriction or prescription will exceed its costs, including by raising a regulatory burden not only on well-resourced incumbents, but on new entrants.
To arrange to receive the table we have prepared on the Hayne recommendations, please get in touch with our contacts.
Australian Royal Commission interim report: one step closer to judgement day
The Hayne interim report: consumer lending
The Hayne interim report: agricultural lending
The Hayne interim report: small and medium sized enterprises
The Hayne interim report: financial advice
The Hayne interim report: regulation and the regulators
Conduct and culture shift by end of March 2019