The Financial Markets Authority (FMA) has released its finalised Conduct of Financial Institutions (CoFI) guidance note: intermediated distribution (June 2023).
Our previous commentary summarising the draft guidance note that was released for consultation in February this year is available: here.
We summarise the main changes arising from the public consultation.
Meaning of “shared responsibility” for consumer fair treatment
Responding to concerns that references in the draft guidance to financial institutions and intermediaries having a “shared responsibility” for consumer fair treatment implied an additional duty for intermediaries, FMA has clarified that “shared” means only that the financial institution and the intermediary are expected to collaborate where appropriate and necessary to ensure consumers are treated fairly.
Collaboration may not always be necessary and may not always be needed to remedy all deficiencies, and the extent of the collaboration may differ according to the particular arrangements the parties have in place, including considerations such as information access, contractual provisions and efficient resolution.
However, the FMA expects that, in most circumstances involving the remedying of deficiencies, a collaborative approach will necessarily require communication between the financial institutions and intermediaries.
Employer/group insurance schemes
The FMA has confirmed that the provision of insurance by an insurer under a group scheme is covered, even if the employer (as the policyholder) does not satisfy the ‘intermediary’ definition.
Financial institution intermediaries present reduced risks to consumers
Where the intermediary is a CoFI licensed financial institution, it is accepted that there is a generally lower risk that distribution through these intermediaries will breach the fair conduct principle.
- While intermediaries who are licensed financial advice providers (FAPs) are accepted by FMA as posing a lower level of risk to consumers, the FMA’s expectation is that financial institutions treat this as a starting point only and conduct their own risk assessment taking into account any factors that might increase the risks posed by a particular FAP. (FMA was also careful to note in its feedback summary report that this presumption in favour of licensed FAPs did not mean that it considered non-FAP intermediaries to be high risk);
- Although contractual agreements are not a necessity in all circumstances, the FMA expects that the roles and responsibilities of the financial institution and the intermediary be agreed “ideally in writing even if it is not in the form of a contract”; and
- Attestations may be a review tool for higher risk distribution methods, but they should be supplemented by supporting evidence or further investigations where warranted, and that regardless of the level of risk, the FMA expects to see attestations used in combination with other review processes (e.g., assessment of lead and lag indicators, and spot checks)
The clarification of what is implied by “shared responsibility” is especially helpful, and we are pleased that the FMA has retained its acknowledgment that financial advisers’ legal responsibilities lie under the financial advice rules and financial institutions’ responsibilities lie under CoFI.
Financial institutions will welcome the increased flexibility the finalised guidance provides - in particular, the confirmation that attestations may be a sufficient means to monitor intermediaries and is likely to need supplementing only when reviewing higher risk intermediaries. The FMA is also encouraging an industry-led approach to achieve consistency where possible, which would assist intermediaries required to prepare multiple attestations.
The FMA continues to seek a balance which does not involve financial institutions imposing a disproportionate burden on intermediaries when the risk is low, but expects a more conservative stance in relation to distribution methods that present a high risk to consumers.
Intermediaries will also take some comfort from the FMA’s statement that it does not anticipate monitoring the compliance obligations placed on intermediaries by financial institutions, except where it becomes aware that consumers may be treated unfairly as a result.