The Financial Markets (Conduct of Institutions) Amendment Bill will be clearer and more workable as a result of the select committee process.
We run through the recommendations, which we assume will be adopted by the House as the Bill has cross-party support, and we applaud the committee’s willingness to respond to submissions from industry participants, including Chapman Tripp.
Fair conduct programmes restricted to financial institutions
Only financial institutions (and not also intermediaries as previously proposed) will have the duty to take all reasonable steps to comply with fair conduct programmes, and they will be required to ensure that their intermediaries:
- receive initial and ongoing training on the fair conduct programme and the financial institution’s procedures or processes to support compliance with the fair conduct principle
- are checked to ensure they have completed the training and have a reasonable understanding of the matters that have been covered, and
- are managed and monitored to ensure that they are supporting the financial institution’s compliance with the fair conduct principle.
We welcome this change as imposing fair conduct programme obligations on top of the financial advisers’ duties and Code requirements due in March 2021 would lead to duplication and inconsistency, and would create unnecessary compliance costs.
Fair conduct principle clarified
The Fair Conduct Principle has been clarified through the addition of a non-exhaustive list of factors that financial institutions must consider in relation to their fair conduct programmes. These factors are to:
- pay due regard to consumers’ interests
- act ethically, transparently and in good faith
- assist consumers to make informed decisions
- ensure that services and associated products are likely to meet the requirements and objectives of likely consumers, and
- not subject consumers to unfair pressure or tactics or undue influence.
We welcome this clarification, but consider that a complete description of the principle would have more closely adhered to Lord Bingham’s rule of law principle that laws be accessible so far as is possible, intelligible, clear and predictable.
The Committee has removed the previously proposed breach threshold that it was enough that an individual consumer had been treated unfairly. We and others argued strongly for this change on the basis that an individual focus would be inappropriate when the legislation is targeted at “whole of market” activities, such as product design.
Incentives regulations narrowed
The incentives regulations now apply only to intermediaries who are directly involved in the distribution chain for relevant products, services or associated financial advice.
In the Bill as first drafted, they would also have applied to intermediaries who had limited or no consumer interaction (for example, claims management).
Regulatory licencing exemptions permitted
Exemptions from the conduct licensing requirement will be allowed for specified types of financial institutions in the same manner as the Financial Markets Conduct Act 2013 permits for other types of licences.
Commencement date set back a year
The Bill will now come into force no later than three years after enactment (before it was two). The extension will give more time for the supporting regulations to be consulted on and for industry to prepare.
- a new obligation on financial institutions to provide the Financial Markets Authority with copies of their fair conduct programmes, and a reduced obligation to make summaries of the fair conduct programme publicly available
- a requirement on the Minister when recommending incentives regulations to consider specified factors, including the likely effect on the availability of relevant services and products and financial advice, and on the financial services industry generally, and
- a statutory review to be started within five years of the regime coming into force, with the Minister required to present a copy of the report to Parliament within another two years.
Overall we think that the changes made by the Committee have significantly improved the Bill. They are consistent with our written submission, and with the oral submissions Tim Williams made to the committee (which we elaborated on in additional written submissions requested by the Committee).
The Minister’s legislative obligation to consider how any incentives regulations may impact consumer choice and the operation of financial services markets will hopefully ensure adequate protections against impractical restrictions on paying commissions.
It is also good to see the Committee affirming the important principle that, where significant obligations (especially ones that may affect the financial viability of individuals and entities) are to be imposed, this should be done to the greatest extent possible through legislation, rather than by regulation, so to maximise certainty and Parliamentary scrutiny.
When the Bill will proceed to the next stages will not be known until after the General Election has been held on 19 September 2020, and the new Government’s legislative programme has been finalised, which may not be until early next year depending on any coalition negotiations.