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Chapman Tripp has made a submission to the Ministry of Business, Innovation and Employment (MBIE) on the Options Paper on the Conduct of Financial Institutions.
We consider the proposed reforms need to be proportionate to the issues that have been identified. Over-reach could stifle competition by setting up unreasonable barriers to entry, and/or create a highly conservative and risk-averse culture.
As some of the proposals carry potentially significant cost implications, it is important that there is a proper cost benefit analysis in the second stage of the review to inform decision-making.
Our submissions in broad are below:
Options for Overarching duties – regard should be had to the conduct and customer focused duties in adjoining regulatory regimes, such as the Credit Contracts and Consumer Finance Act 2003 and Financial Advisers Act 2008. An outcome which has conflicting or inconsistent duties across the various regimes would undermine the authority of each regime, create redundancy where there are points of difference, and impose unnecessary costs.
Options to improve product distribution – a key design consideration in developing the policy around permitted remuneration arrangements should be that it not dis-incentivise customers from seeking needed financial advice.
Options to improve product design – we have concerns with the proposals to give the regulator power to ban or stop the distribution of specific products on the basis that they have poor customer outcomes. The proposal to require manufacturers to identify the intended audience for products and distributors to have regard to this audience is potentially attractive, but careful consideration of the experience in Australia will be needed.
Options relating specifically to insurance claims – our experience is that insurers do not intentionally underpay or delay the settlement of valid claims. While we support the proposed requirement that claims handling is fair, timely and transparent, we do not think it will have any significant positive effect on insurance settlements. We do not support prescribing timeframes for the settlement of claims.
Options for tools to ensure compliance – we agree with the proposal that the Financial Markets Authority (FMA) should monitor and enforce compliance with the good conduct regime. However, we have reservations with the proposal that banks and insurers be required to obtain a conduct licence. Any penalties regime must achieve an appropriate balance between driving compliance and protecting innovation and healthy business risk-taking.
Who should the conduct regulation apply to? – as a starting point, the options should apply to banks and insurers. Ultimately, however, the regime should apply to all financial service providers. Our preference is that the conduct regime is “overlaid” onto existing regulation. The benefit of having a consistent regulatory umbrella for all conduct will outweigh the time and effort needed to eliminate inconsistency with existing regimes.