FMA's guide to outcomes-based regulation

20 February 2024

The Financial Markets Authority (FMA) is consulting on guidelines for a new outcomes-based approach to regulation to be based on seven “fair outcomes” that firms will be expected to focus on.

The Draft Guide and Consultation Paper were released on 15 November 2023 with responses due by 1 March 2024.

Although the Draft Guide states that the “fair outcomes” are not rules, the FMA will expect financial service or product providers to “demonstrably embed them in the way they operate”, noting that they will inform how the FMA exercises its role “as a kaitiaki of financial markets” and how it approaches its supervisory and enforcement work.

Through focusing on the outcomes, the FMA wishes to avoid a “tick box mentality” where technical compliance is the end goal, which it considers “may not provide the best result for consumers or markets”.

In the Draft Guide, the FMA sets out its view of the end results that the regulation intends to achieve, while leaving providers to determine for themselves what is required within their business to most efficiently achieve those outcomes. The idea is that the FMA will then be able to monitor the conduct of providers by observing whether these “fair outcomes” are being delivered in the market.

The seven “fair outcomes”

The seven “fair outcomes”, representing the end results being sought for consumers and markets in New Zealand, are that:

  1. Consumers have access to appropriate products and services that meet their needs.
  2. Consumers receive useful information that aids good decisions.
  3. Consumers receive fair value for money.
  4. Consumers can trust providers to act in their interests.
  5. Consumers receive quality ongoing care.
  6. Markets are trusted based on their integrity and transparency.
  7. Markets enable sustainable innovation and growth.

The Draft Guide provides a more detailed description of each fair outcome, including the main concepts underpinning them and illustrative examples.

Consumer focus

Five of the seven outcomes relate to consumer-level outcomes; the other two relate to market-level outcomes.

The consumer-level outcomes expand on the concept of “good customer outcomes” in the 2017 Guide to the FMA’s View of Conduct, which is primarily aimed at licensed providers. 

The Draft Guide states that the outcomes-based approach is not intended to “replace or introduce new rules or regulations”, but rather help guide providers to comply with their FMC Act obligations.

However, there are several instances where they appear to impose expectations on market participants that go beyond the existing FMC Act obligations. For example:

  • Outcome 2 refers to providers having "checks and balances to prevent consumers from accessing products and services that are not suitable for them” as part of ensuring that consumers have access to appropriate products and services that meet their needs (under the FMC Act suitability is a concept applicable to financial advice only); and
  • Outcome 3 indicates that the FMA will expect providers to demonstrate that their products or services provide ‘value for money’, which is specified as meaning that “the price a consumer pays is reasonable in relation to the overall benefits they can expect to receive”. (The FMC Act’s reasonable fee requirements apply only to KiwiSaver schemes).

Also the Draft Guide throughout recasts the FMC Act obligations in different terms and language, creating the risk of confusion about what is required.

All these points are worthy of submission.  

Outcomes-based approach

At the end of the Draft Guide, the FMA sets out what an “outcomes-focused” approach will mean for providers, consumers, the FMA and the New Zealand economy.

The FMA expects that over time, regulatory conversations with firms will be “built around the efforts they are making to achieve” the outcomes. Firms will be expected to consider how they monitor and review progress towards the outcomes, and how they articulate that to the FMA”.

The outcomes will also guide the FMA’s own approach to exercising its regulatory powers and responsibilities. FMA states that they will be the “starting point” for decision-making and that the basis for its monitoring activities.

“The results we see in the market will alert us to where we need to have robust conversations about appropriate practices” and “[w]e will be outspoken where we see practices that are unfair and take enforcement action where appropriate.”

This suggests that, despite the Draft Guide stating that the outcomes do not create rules, the Draft Guide will be influential and effectively create a new lens through which regulatory requirements will need to be managed.

Our view

We support the FMA’s objective of providing clarity about what it will focus on when carrying out its supervisory and enforcement work and how participants can demonstrate that they are complying with the FMC Act. This transparency assists financial market participants to understand the FMA’s expectations.

We also support the FMA’s acknowledgement that “firms are better placed than regulators to determine what processes and actions are required within their businesses to achieve regulatory objectives” and that, having set the outcomes that the regulation seeks to achieve, the FMA “will step back and let firms find the most efficient way to achieve these outcomes”.

However, the Draft Guide should be revised in the following respects:

  • The terms used in the Draft Guide should more clearly align with the specific wording of the FMC Act obligations to which they relate;
  • The Draft Guide needs to be more balanced in recognising that achieving ‘fair outcomes’ requires a proportional approach that weighs the competing rights and interests of both consumers and providers;
  • The outcomes should be adapted to be more applicable to different types of providers (including financial advisers); and
  • Where the Draft Guide contemplates providers doing more than required by the existing FMC Act obligations, it needs to be clearer that these are not legal requirements, but rather are viewed by the FMA as evidence of positive culture and intent.  

We encourage providers of financial products or services who may be affected by FMA oversight to consider making submissions on the Draft Guide. Submissions from providers will be crucial to ensuring that the required revisions are made.

Next steps

The FMA is welcoming feedback from all stakeholders. The submissions will influence the final shape of the outcomes-based approach, which will directly impact how the FMA regulates the sector. We urge you to get involved in the process, if you haven’t already.

If you would like more information or assistance in making a submission, please get in touch with one of our experts.

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