The Financial Markets (Conduct of Institutions) Amendment Bill has been introduced to Parliament.
This Bill is designed to:
- require financial institutions to be licensed by the FMA (at this stage, registered banks, licensed insurers and licensed non-bank deposit takers)
- require financial institutions and intermediaries to comply with a fair conduct principle and a fair conduct programme to be established by those financial institutions in respect of all their products and services, and
- regulate incentives, including prohibiting incentives based on volume or value sales targets, through regulations yet to be drafted.
This is largely “framework” legislation, with the “meat” to come later.
The timeframes for introduction of the requirements can be measured in years rather than months.
The Bill in Detail
Fundamental Duties to Meet Fair Conduct Principle
The Bill introduces a ‘fair conduct’ principle. This will require financial institutions (or intermediaries) to treat consumers fairly by paying due regard to their interests. In order to abide by the new principle, institutions will need to establish, implement and maintain fair conduct programmes. These programmes will need to be in writing, and available to the public. The specific requirements are expected to be further specified in regulations.
Duties Relating to Incentives Regulations
The Bill seeks to make several changes to incentives. Financial institutions and their intermediaries must comply with regulations relating to incentives. The regulations themselves are yet to be comprehensively detailed.
Registered banks, licensed insurers and licensed non-bank deposit takers (NBDTs) providing relevant services, will be required to obtain a licence from the FMA. Relevant services is defined broadly under the Bill, but is limited to retail and consumer services. Existing banks, insurers and NBDT will be licenced unless the Reserve Bank of New Zealand (RBNZ) has significant reservations, and considers that a licence needs to be withheld in order to maintain the soundness and efficiency of the financial sector or insurance sector.
New Zealand consumers of banking and insurance products are expected to be the main beneficiaries of these proposals. However, significant costs are expected to fall on banks, insurers, NBDTs and their intermediaries selling productions to retail customers. Compliance costs are expected to be moderate to high as noted by the Ministry for Business, Innovation and Employment (MBIE) in their Regulatory Impact Statement. Further, administrative and enforcement costs to the Government and the FMA will be significant.
There is a lengthy introduction phase
The Bill is not expected to have its first reading until early next year, after which it will be referred to the Select Committee who will call for submissions. The Bill still has to go through the Select Committee/public consultation phase (after which there will likely be changes to the Bill), and then be passed into law. There will also need to be regulations consulted on and made, and a range of guidance published by the FMA (including, we expect, in relation to the requirements for licensing and the licensing process). All this will take several years to complete (if not longer), and then there will be a transitional phase which may be up to four years.
Chapman Tripp comment
The proposed legislation regulates the banks, insurers and non-bank deposit takers which are already subject to registration and licensing regimes under RBNZ. Care will need to be taken to ensure that the further licensing obligations under the FMCA are streamlined, the licensors are co-ordinated and the obligations are consistent and not duplicated.
The requirements apply to all products and services provided by the relevant institutions, which may create comparative cost advantages through less regulation of products provided by unlicensed providers, such as boutique fund managers, wholesale funded finance companies and peer-to-peer lenders.
A number of the details of the Bill have been left for regulations to establish. Often the “devil is in the detail”. A close watch on further developments regarding the regulations is warranted.
There will be no consultation before the Bill goes to the Select Committee. Thus, the Select Committee process will be a key opportunity to submit feedback on the Bill.
If you would like to know more about the Bill, need advice on financial institution conduct, or assistance preparing a submission, please contact any of the people listed.
Updated Regulatory Impact Statement – December 2019