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7 July 20225 minute read

Financial Markets (Conduct of Financial Institutions) Amendment Act — A Snapshot

Nearly three years after being introduced to Parliament, the Financial Markets (Conduct of Financial Institutions) Amendment Act 2022 (CoFI) received Royal assent on 29 June 2022. CoFI amends the Financial Markets Conduct Act 2013 (FMCA) to require that financial institutions treat consumers fairly (fair conduct principle).

CoFI had its genesis in the 2017 Australian Royal Commission into Financial Services, which inspired New Zealand's FMA / Reserve Bank of New Zealand joint Conduct and Culture Review. New Zealand's Review found significant gaps in our regulatory regime for "conduct" in the banking and insurance industries.

What duties does CoFI impose?

CoFI seeks to hold banks, insurers and non-bank deposit takers (referred to as "financial institutions") to a high level fair conduct principle. While not legally enforceable in its own right, the principle will be implemented by requiring financial institutions to obtain a Financial Markets Authority (FMA) conduct licence, and to establish, implement and maintain an effective "fair conduct programme".

The fair conduct principle includes:
  • paying due regard to consumers’ interests; 
  • acting ethically, transparently, and in good faith;
  • assisting consumers to make informed decisions;
  • ensuring that the relevant services and associated products that the financial institution provides are likely to meet the requirements and objectives of likely consumers (when viewed as a group); and
  • not subjecting consumers to unfair pressure or tactics or undue influence.

The Government has signalled that it does not currently intend to promulgate regulations prescribing detailed requirements for fair conduct programmes. It will instead rely on FMA guidance in this area. Regulations will however be made prohibiting sales incentives based on volume or value-based targets to employees (excluding senior managers and executives), agents and intermediaries.

Fair conduct programmes

Financial institutions will be required to put in place programmes, tailored to their businesses, products offered and customers (including vulnerable customers) to deliver fair conduct outcomes. A summary of the programme must be on the financial institution’s website and provided on request.

CoFI sets out minimum standards for fair conduct programmes.

Changes for intermediaries

CoFI has been through several rounds of review since it was introduced in 2019, resulting in various changes.

A supplementary order paper (SOP) tabled for the House committee and third reading has reduced the burden relating to intermediaries. Under the SOP, financial institutions will no longer be responsible for oversight of the training and supervision of intermediaries and agents. This oversight responsibility will now apply only to the financial institution's own employees. Intermediaries are also no longer required to follow procedures or processes to support financial institutions' compliance with the fair conduct principle. Intermediaries are now only obligated to comply with regulations to be introduced, prohibiting sales incentives. 

The definition of "intermediary" has also been narrowed. Now, only those who are arranging a contract for a relevant service or for acquisition of an associated product, and / or providing regulated financial advice in relation to such a product, and who receive a commission for doing so, are considered intermediaries. For example, this includes retailers selling add-on insurance or credit. Parties involved in broader preparatory, administrative and claims fulfilment services are not considered intermediaries.

Our view

CoFI signals a shift from rules-based regulation to principles-based regulation in the context of the FMCA. Interestingly, the associated Cabinet Paper highlighted the industry's preference for the FMA's increased remit to publish guidance rather than prescriptive rules contained in the FMCA. This will require a different skillset when assessing compliance.

The scope of CoFI, including the changed definition of intermediary, will be of interest to many in the financial services sector. CoFI could be viewed as creating different conduct regimes for two classes of fund managers: those related to a financial institution and those which are not. Regardless, fund managers should not close their eyes to CoFI. CoFI's principles-based regulation is likely to extend to a broader section of the financial services industry in the future, and the broader funds management industry will be mindful of CoFI in considering what "acting in the best interests" of customers means under FMCA.

We are sympathetic to the view that CoFI represents an additional and potentially costly burden on financial institutions. For example, the burden may deter financial institutions from broadening their range of products. FMA guidance on the extent of CoFI's compliance requirements will be awaited with interest.

What's next?

Licensing applications are expected to open in mid-2023 and be open for approximately 18 months. The regime is expected to come fully into force in early 2025.

Standard Financial Institution licence conditions will be proposed by FMA for consultation later this month. Consultation on regulations relating to sales incentives and licensing fees is expected later this year. The regulations are expected to be put in place in early 2023.

We expect that the FMA will release CoFI guidance before licensing applications open. FMA's updated conduct guide is also expected later this year.

Pending the issuing of guidance, standard licence conditions and regulations, financial institutions will be considering:

  • how they will comply with the new licence conditions in the context of their business, products and customers;
  • what new policies and processes they will need to implement, and what changes they will need to make to existing policies and processes to comply; and
  • how they can show that services and products are fit for purpose and that customers are being treated fairly.