The Financial Markets Authority (FMA) and the Ministry of Business, Innovation and Employment (MBIE) are seeking feedback on how to fund an expansion of the FMA’s role into three new areas.
MBIE is also consulting on the timeline for implementation of the Conduct of Financial Institutions Bill.
Submissions close on 7 November 2021. The recommendations are due with Cabinet in March/April next year to be in place by July.
New FMA mandates
The FMA’s remit will soon include three additional mandates, to be phased in over the next three to four years.
- Conduct of Financial Institutions (CoFI). The CoFI Bill is expected to pass by mid-2022, with conduct licensing of banks, other financial institutions and insurers to be phased in from mid-2023, and all laws to be in force by December 2024. The design and implementation costs of this regime are expected to be significant.
- Insurance contract law (ICL) review – an exposure draft of the Bill is planned for release later this year for passage in Parliament by late 2023/early 2024. The Bill will change the laws applying to disclosure of information by consumers, strengthen protections against unfair contract terms and require that contracts are written clearly for ease of understanding.
- Climate-related disclosures (CRD) – a new climate change reporting framework will be inserted into the Financial Markets Conduct Act 2013 with affected entities required to provide annual climate statements from late 2023/early 2024.
The consultation document outlines the increased funding required for the FMA to manage these new responsibilities and proposes changes to the FMA levies paid by affected financial markets participants. Beyond this group, levy settings will remain unchanged.
Two funding options
Feedback is sought on two funding options for each new regime. The underlying costs for each option have been independently assessed across a four-year horizon by Deloitte.
Option 1 – The higher funding option
- Conduct of Financial Institutions funding of $42.1m over the next four years would support development of a detailed licensing process, a proactive and proportionate monitoring approach, guidance and standards that set clear expectations, and early identification of risks
- Insurance contract law funding of $5.1m over the next four years would support proactive industry engagement and guidance, and monitoring of compliance
- Climate-related disclosures funding of $7.6m over the next four years would support a proactive approach toward obtaining consistent high-level climate disclosures.
Option 2 – The lower funding option
- Conduct of Financial Institutions funding of $29.5m over the next four years would support a more generic and less risk-based licensing process, a more reactive approach to identifying risk and harms, and a more enforcement-led approach to misconduct
- Insurance contract law funding of $3.1m over the next four years would support a longer implementation period during which FMA’s focus would shift from shaping the regulatory approach, to monitoring and engagement with industry and consumers, to business-as-usual, light touch, monitoring
- Climate-related disclosures funding of $5.8m over the next four years would support a more reactive approach, with less focus on communicating compliance expectations and on engagement with industry and a slower approach to building capabilities.
The strategic alignment, achievability and public value available through the two funding options are explored for each regime to inform feedback on which option is the more appropriate, what the impact would be on the responder’s business, and whether any material changes should be made to the proposals on offer.
Funding recovery options
The last funding review, conducted in 2019-2020, led to the FMA’s baseline funding being raised by $24.805m with levy payers meeting 83% of the increase and the Crown the remaining 17%.
MBIE is considering whether this ratio should be maintained through the proposed funding increase, or whether any funding increases should be fully levy-funded. The criteria MBIE proposes to apply in making this decision are:
- proportionality – between the Crown and the levy payer should reflect the public good element of the FMA’s operations as well as the private benefit levy payers receive from well-regulated financial markets
- equity – the relative impacts of the split between Crown and levy funding (e.g. ability to pay) should be taken into account, and
- sustainability – the split of funding should be sustainable and viable in the long-term.
Feedback is sought on these matters and which funding recovery option is appropriate.
Impact of FMA levy
MBIE and the FMA propose that larger banks, insurers and climate-reporting entities should pay a relatively larger portion of any levy increase, having assessed the proposed increased funding requirements against the levy objectives of:
- ensuring that the cost to levy payers is consistent with the benefits they receive
- not discouraging entry into the market for, or the continued supply of, financial products or services
- not unduly burdening smaller market participants, and
- ease of implementation and collection.
The revised and new levy classes proposed are:
- Revised Class 2 (non-retail registered banks and NBDTs)
- New Class 2A (retail registered banks and NBDTs) for CoFI
- Revised Class 3 (non-retail insurers) for ICL
- New Class 3A (retail insurers) for CoFI and ICL
- New Class 17 (Climate-reporting entities) for CRD
Feedback sought on CoFI timeframe
The proposed high level timeframes on which feedback is sought are:
- CoFI Bill is passed into law in the first half of 2022
- FMA opens applications for conduct licence in July 2023
- all financial institutions must be licensed, and all obligations under CoFI in force (including regulations) in December 2024.
Relevant factors MBIE took into account in developing these timelines were that industry have sufficient time to prepare, the timing of Financial Advice Provider full licensing, and enabling FMA to assess conduct licensing applications, as well as a possible “phased” licensing window.
The consultation period is relatively short with submissions due in a little more than three weeks. Please contact us if you would like assistance preparing your submission.