Submissions sought on prohibited incentives regulations and CoFI licensing fees

No surprises that the exposure draft regulations prohibit volume or value targeted incentives 

As part of overall reforms to the financial services sector, culminating in the passage of the Financial Markets (Conduct of Institutions) Amendment Act 2022 (the CoFI Act), the Government made the policy decision to prohibit financial institutions and intermediaries from offering sales incentives based on volume or value targets. Whilst the term “incentive” was defined in the CoFI Act, the exact wording of the prohibition of sales incentives based on volume or value targets was left to be regulated by regulations.

MBIE has now released the exposure draft regulations defining a “prohibited incentive”, and volume or value targeted incentives are prohibited as expected.

Prohibited incentives

The exposure draft regulations provide that an incentive is a “prohibited incentive” if “a person’s entitlement to the incentive, or the nature or value of the incentive, is determined or calculated in any way by reference (directly or indirectly) to a target or other threshold that relates to the volume or value of the services or products”.

The definition closes the door on the possibility of permitting volume or value targets as part of a larger “balanced scorecard approach” (where, for example, other metrics such as customer satisfaction are taken into account). Balanced scorecards, however, may still be implemented provided they do not contain any metrics based on volume or value targets.

Further, the definition of “prohibited incentive” is expected to result in the banning of most soft commissions (e.g., paid holidays or attendance at conferences) as these would ordinarily require entitlement thresholds. Again, this does not represent a broadening of policy. The current approach however leaves open the opportunity for conferences for all financial advisers within a network for free or at a fixed price, as these would not be based on volume or value targets.

With respect to the definition of a “prohibited incentive”, MBIE is seeking specific submissions on:

• whether or not MBIE’s proposed definition of “prohibited incentive” gives proper effect to the Government’s policy decision to prohibit volume or value targets, and
• views with respect to MBIE’s examples given as part of their definition of “prohibited incentive”.

Relevant persons

The exposure draft regulations will prohibit financial institutions and intermediaries from offering a prohibited incentive to a “relevant person” only. For the purposes of the exposure draft regulations, a “relevant person” is any employee, intermediary or agent of a financial institution or intermediary involved in the provision of the financial institution’s or intermediary’s relevant services or associated products. We have previously written about what it means to be “involved” in the provision of a relevant service or an associated product here.

Senior managers and executives exclusion:

The definition of “relevant person” requiring that the person be “involved” in the provision of a relevant service or associated product is being used to implement another policy decision made by the Government to not prohibit volume or value targets for senior managers and executives. Relief for senior managers and executives was proposed because Government considered that the greatest conflicts of interest, and poor conduct and culture, would result from mid-to-lower levels of an organisation.

MBIE is proposing to exempt persons who are not “involved”, and not necessarily senior managers and executives (i.e., the regulations will look to the involvement of the individual, and not the title/position they hold). Therefore, provided that senior managers and executives are not “involved” in the provision of a relevant service or associated product, volume or value targets are permitted to be offered as part of reasonable remuneration. However, if senior managers and executives are “involved” in the provision of a relevant service or associated product, then they cannot be remunerated based on volume or value targets.

MBIE is now seeking submissions on the proposed definition of “relevant person”.

Our comments

Despite the broad powers given to MBIE under the CoFI Act to regulate incentives, the exposure draft regulations are largely consistent with Cabinet’s stated policy intent.
The detailed drafting of the regulations does provide some grounds for submissions, including whether the utilisation of the “involved” definition achieves Cabinet’s “senior managers and executives” relief.

Further, it is important to remember in this context that the regulations’ “volume or value” targets prohibitions are not the only restriction on commissions and other incentives. As part of their fair conduct programmes, financial institutions must design and manage incentives to mitigate or avoid the actual or potential adverse effects of incentives on the interests of consumers, so far as reasonably practicable.

Reasonable fees set for financial institution licences

MBIE has also released a discussion paper on the proposed financial institution licensing fees. MBIE is expecting around 100 financial institutions to require a financial institution licence under the CoFI regime.

MBIE has proposed a user-pay approach to fees for applications, and they are as follows (all inclusive of GST):

• a flat fee of $1,024.93 for all applications,
• with respect to applications that require more than 6.75 hours to asses, time charged at $178.25/hour,
• a flat fee of $614.95 per authorised body to be included in the licence, and
• for other variations to the licence, a flat fee of $115 plus time charged at $178.25/hour.

MBIE considered the above approach to alternative sources of funding such as flat fees for all applications, different classes of licences and Crown funding.

MBIE is now seeking submissions on their proposed fee structure and analysis with regards to alternative funding options.

Next steps

While it is unlikely that any material policy shifts can be achieved at this stage, it will be important for all financial institutions and intermediaries to consider the exposure draft regulations and proposed licensing fee structure, and the implications on your business.

Submissions on the proposed financial institution licensing fees are due by 26 October 2022, and submissions on the exposure draft regulations are due by 9 November 2022. MBIE intends to finalise the regulations in Q1 2023 and for them to come into force in early-2025 in line with the CoFI regime.

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