FMA on fair conduct principles for intermediated distribution

16 June 2023

The Financial Markets Authority (FMA) is expected to release its final Conduct of Financial Institutions (CoFI) guidance note on intermediated distribution in the near future; submissions having closed on 14 April 2023. We summarise the draft guidance as a guide to the FMA’s thinking.

CoFI intermediated distribution requirements

Before Financial Institutions (FIs) can apply for a CoFI licence, which FIs will need before 31 March 2025 when CoFI comes into force, FIs will need to have an effective Fair Conduct Programme (FCP), comprising policies, processes, systems and controls to ensure the FI complies with the fair conduct principle, including by:

  • Providing for the distribution methods the FI uses (including those involving intermediaries) to operate consistently with the FI’s FCP; and
  • Regularly reviewing whether the distribution methods are operating consistently with the FCP, and ensuring any deficiencies are remedied within a reasonable time.

In designing their FCP, FIs must have regard to the factors specified in section 446J(2), which include the types of:

  • Intermediaries that are involved in the provision of its services and products, including the nature and extent of their involvement, and their legal obligations in connection with that involvement; and
  • Agents that are engaged to carry out work in relation to the FI’s services and products, including the nature and extent of that work and of the authority of those agents.

FMA’s key expectations

The FMA won’t prescribe what FIs must do to comply with CoFI or set out a list of steps or rules that they must follow – explicitly recognising that there is no ‘one-size-fits-all’.

It notes that CoFI gives FIs flexibility to determine how their FCPs provide for distribution methods to operate in a manner which is consistent with the fair conduct principle taking a risk-based and proportionate approach.

Significantly, the FMA recognises that FIs will not generally need to impose the same level of control on Financial Advice Provider (FAP) intermediaries as on non-FAPs given that the former (including the advisers and authorised bodies operating under their licences) are already subject the obligations of the financial advice regime.

The key expectations set out in the draft guidance are summarised below.

Determining the likely consumers of products and services

For each of their different types of products and services, FIs should consider identifying and documenting the intended purpose, the likely consumers (or circumstances) they are designed for, and the likely requirements of those consumers (at a general or collective level).

Determining appropriate distribution methods

FIs should consider identifying and documenting what distribution methods are appropriate for the likely consumers of their products or services (including the consumers’ likely requirements and objectives) and ensure that the products or services are distributed to those consumers.

Determining the roles and responsibilities of FIs and intermediaries

FIs are expected to consider identifying and documenting the respective roles and responsibilities of them and their intermediaries, and how this supports customer fair treatment through the service or product life cycle.

Determining how distribution arrangements will be managed

FIs should consider addressing how intermediary arrangements will be managed, and what processes and controls may be required so that distribution arrangements support fair treatment.

The FMA considers that contractual arrangements between FIs and intermediaries are “good practice”. 

Determining what product information or training will be provided

FIs are responsible for providing appropriate product information and training to intermediaries, and should consider identifying information, training or accreditation (including the appropriate form or medium for this) to be given to the intermediaries.

Reviewing distribution methods

FIs must avoid a ‘set and forget’ approach and regularly review whether their distribution methods are operating consistently with the fair treatment principle.

The review frequency will vary depending on the FI’s risk assessment, and particular distribution methods should be reviewed sooner if analysis of key metrics suggests there is a problem.

The FMA states that it does not expect:

  • Constant surveillance of intermediaries (noting that CoFI had been amended to delete references to FIs “managing or supervising” intermediaries);
  • Monitoring individual instances of advice or individual sales (regular reviewing is to be done at the general or collective level);
  • FIs to supervise intermediaries’ legal compliance (this is the intermediary’s responsibility); and
  • Annual external audits or independent assurance reports as routine compliance measures (these are appropriate for higher-risk distribution methods or to respond to a specific risk or issue that has triggered an independent review).

Remedying deficiencies

Because the nature of deficiencies may vary widely, the remedy will depend on what the issue is. The draft guidance states further: 

  • FIs should be able to explain why their timeframe for addressing an issue is “reasonable” and account for any delays, and to prioritise stopping future harm to customers as soon as possible after the issue has been identified; and
  • Because FIs and intermediaries have a shared responsibility for consumer fair treatment, it will often be appropriate for FIs and intermediaries to work collaboratively to address distribution issues, but they can determine what works best for them.

Next steps

When the draft guidance is finalised, FIs and their intermediaries should:

  • Assess their arrangements against the FMA’s expectations (including where these may go beyond what the FMA expects, adopting its proportionate and risk-based approach); and
  • Document the findings from this assessment and any changes made as a result.

Please let us know if you would like us to assist with that review, or if you have any questions about how the draft guidance note may impact on your business. 

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