Conduct of Institutions Bill now law

01 July 2022

The newly passed Financial Markets (Conduct of Institutions) Amendment Act introduces a fair conduct and licensing regime for financial institutions, principally by requiring financial institutions to implement a fair conduct programme. The Act also allows for the regulation and banning of incentives paid to intermediaries.

The Act regulates “financial institutions” – registered banks, licensed insurers, and licensed non-bank deposit takers who are in the business of being a creditor under a consumer credit contract, acting as an insurer, providing certain specified retail financial services, and acting as an intermediary for any of these services.

Fair conduct principle

The Act introduces the “fair conduct principle”, which requires financial institutions to treat consumers fairly. This requirement includes (without limitation):

  • paying due regard to consumers’ interests
  • acting ethically, transparently, and in good faith
  • assisting consumers to make informed decisions
  • ensuring services and products being offered are likely to meet the consumers’ requirements and objectives, and
  • not subjecting consumers to unfair pressure, tactics or undue influence.

The fair conduct principle extends to the product/service design phase and is intended to apply across the entire life cycle of financial products and services.

Fair conduct programme

As part of complying with the fair conduct principle, financial institutions must establish, implement and maintain an effective fair conduct programme, which is embedded in their internal policies, process, systems and controls.

Every financial institution is required to consider when preparing its fair conduct programme: its business (including the size of its business), the types of services or products being offered, the distribution channels being used, the types of intermediaries and agents involved (and the intermediaries’ legal obligations for example, if the intermediary is also a licensed financial advice provider) and the types of consumers the financial institution is dealing with (including vulnerable consumers). The following minimum standards (amongst others) are required of all fair conduct programmes:

  • ensuring that the fair conduct programme enables the financial institution to meet all of its legal obligations (including the fair conduct principle) under the Act and legal obligations under other legislation
  • ensuring that all of the financial institution’s distribution methods operate consistently with the fair conduct principle (including through regular reviews)
  • ensuring that the financial institution’s employees and agents follow the procedures or processes that are necessary or desirable to support the financial institution’s compliance with the fair conduct principle
  • communicating with consumers about the financial institution’s relevant services or associated products in a timely, clear, concise, and effective manner, and
  • ensuring that any enhancements or improvements to the financial institution’s relevant services or associated products are made available within a reasonable time.

Fair conduct programmes and intermediaries

Late amendments in the Supplementary Order Paper (SOP), which arose from MBIE’s consultation process which Chapman Tripp actively participated in, have wound back some of the more controversial aspects of the Act relating to fair conduct programmes and their impact on intermediaries. Now, under the Act:

  • intermediaries are not bound by the procedures or processes to support the financial institution’s compliance with its fair conduct programme, and the financial institution has no management or supervisory obligations in respect of intermediaries, and
  • training in the conduct programme is required only for a financial institution’s employees, not its intermediaries or agents.

However, the Act expressly allows that requirements for intermediaries to follow the financial institution’s fair conduct programme may be introduced by regulation, so there is scope for intermediaries to be re-captured (either in whole or in part) further down the track.


An intermediary is any person (including another financial institution) who is paid a commission or other consideration for its “involvement” in providing a relevant service or an associated product. Involvement has been narrowed to exclude distributing advertisements or other activities prescribed by regulations.

A registered bank which acts as a distributor for an insurer will be both an intermediary for the purposes of the Act, and a financial institution which must be licensed and have its own fair conduct programme.

A person is “involved” in the provision of a relevant service or an associated product only if the person:

  • “arranges” a contract for the service or for the acquisition of the product (this is a new term and is defined to include negotiating, soliciting or procuring a contract. It does not include simply carrying out preparatory services and assisting in the administration or performance of the service), or
  • gives regulated financial advice in relation to the product.


A key policy objective of the Act is to prohibit incentives to front-line staff based on volume or value sales targets and soft commissions. The exact wording of this prohibition will be confirmed in regulations. However, the powers delegated to the Minister to regulate incentives remain far broader than regulating incentives with volume or value sales targets and soft commissions. Requirements on the Minister’s considerations when recommending regulations have however been introduced.

It remains to be seen whether the proposed regulations will permit volume or value targets which are subject to adequate controls – for example, conduct gateways, balanced scorecards comprising of mainly non-sales custody outcome metrics and clawbacks when conduct requirements are subsequently found to have been breached by the relevant employee, agent or intermediary.

Additionally, a stated minimum requirement for financial institutions’ fair conduct programmes is to include effective policies, processes, systems, and controls for designing and managing incentives to mitigate or avoid the actual or potential adverse effects of incentives on the interests of consumers, so far as is reasonably practicable. This requirement would support financial institutions curtailing incentives further than required by regulations in appropriate circumstances.

An “incentive” for the purposes of the Act is any commission, benefit or other incentive (whether monetary or non-monetary, and whether direct or indirect) that is offered or given to a person if:

  • the incentive is offered or given in connection with that person’s involvement in the provision of a service or product, and
  • that person’s entitlement to the incentive, or the value of that incentive, is determined or calculated by reference (directly or indirectly) to the volume or value of the services or products.

Next steps

The aim of the Government and FMA is to have the new licensing application process open by mid-2023, only a year away, and the regime to come fully into force by early 2025.

Boards and senior management can begin their preparations by:

  • familiarising themselves with the changing consumer-centric regulatory landscape and regulator’s expectations
  • thoroughly reviewing their business practices against regulator commentary (both in New Zealand and overseas). In particular, we recommend the FMA’s “A guide to the FMA’s view of conduct” and the Reserve Bank and FMA’s thematic reviews of bank and life insurer conduct and culture, as starting points, as well as relevant commentary from the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
  • considering what their fair conduct programme may entail. However, there is likely to be relevant guidance issued to assist in the future, and
  • preparing a detailed and methodical action plan, setting out the proposed steps, including the preparation of, and changes to, internal policies, processes, systems and controls, to align them with the fair conduct principles and the business’s fair conduct programme by the time its conduct licence is sought.

Finally, the FMA intends to launch, in the second half of July, public consultations on the standard conditions that will be placed on conduct licenses. We encourage all financial institutions affected by the Act to engage in the consultation process.

Please let us know if you require advice or assistance.

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