Consultations on CoFI Regulations
The Ministry of Business, Innovation and Employment (MBIE) is currently consulting on two proposed regulations made under the Financial Markets (Conduct of Institutions) Amendment Act 2022 (CoFI). The consultations cover:
1) the prohibition on certain sales incentives; and
2) proposed licensing fees for financial institutions.
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 FMA has recently consulted on proposed standard conditions for CoFI licences.
You can find our previous updates on CoFI here and here.
Prohibition on certain sales incentives
The proposed regulations prohibit financial institutions and intermediaries from offering volume or value-based incentives to a "relevant person". Under CoFI, a "relevant person" is an employee, intermediary or agent involved in the provision of relevant services or products.
"Incentives" are defined as any commission, benefit, or other incentive (whether monetary or non-monetary and whether direct or indirect) that is offered or given to a recipient in connection with that recipient being directly or indirectly involved in the provision of the services or products. Volume or value-based incentives are determined by a target or threshold that relates to the volume or value of the service or products. For example, if an individual receives a $1,000 bonus for selling 100 products but a $5,000 bonus for selling 200 products, each within a three-month period, then this would be a volume-based incentive. However, linear-based incentives (on a per service or per product sold basis) are not prohibited as they are not determined by reference to a target or threshold. For example, a 5 per cent commission per product sold would not be captured by the prohibition.
The prohibition on non-monetary incentives means that additional annual leave or other "soft incentives" that are linked to the volume or value of products or services the recipient has sold are also captured by the proposed regulations.
Only individuals that are directly or indirectly "involved" are subject to this prohibition. A person is "involved" in the provision of a relevant service or product if they (i) arrange a contract for the service or for the acquisition of the product; or (ii) give regulated financial advice in relation to the product. If senior managers or executives are not "involved", they are exempt from the prohibition on volume or value-based incentives. This is in line with the shift to principles-based regulation and the cabinet paper released by MBIE seeking to exempt senior managers and executives, as (i) the greatest conflicts of interest are likely to occur at the mid-to-lower levels of an organisation where relevant individuals are more closely connected to the distribution of financial services or products to customers; and (ii) non-linear incentive structures are more susceptible to inducing behaviour inconsistent with good consumer outcomes compared to linear incentive structures.
MBIE expects written submissions on the sales incentives consultation by 5pm, Wednesday 9 November 2022.
Proposed licensing fees for financial institutions
Licensing fees will be incorporated into the Financial Markets Conduct (Fees) Regulations 2014 (Fees Regulations) and are designed to fund the FMA's costs in assessing licensing applications. They are charged separately from and in addition to FMA levies.
MBIE's discussion paper proposes a flat licensing application fee for standard applications, with an additional hourly rate for more complex applications. The proposed flat fee is $1,024.93. This was calculated based on an estimated 5.75 hours to assess a standard licence application and includes time for follow up questions. A further $614.95 is proposed for each additional financial institution covered by the licence, known as "authorised bodies".
For complex applications which take longer than 6.75 hours to assess, the FMA may invoice the applicant for additional hours at an hourly rate of $178.25. The FMA will notify an applicant if it is likely to be charged the hourly rate and the reasons for being charged the hourly rate.
Applications to vary licence conditions will be charged at the existing variation fee in the Fees Regulations of $115 plus $178.25 per hour.
These licensing fees represent an additional burden on financial institutions which are already required to pay FMA levies and other fees. Fortunately, CoFI licences have no expiry and need only be obtained once (subject to financial institutions continuing to satisfy their licence conditions).
MBIE expects written submissions on the licensing fees consultation by 5pm, Wednesday 26 October 2022.
The final CoFI regulations are expected in early 2023. The FMA is also expected to release a licence application guide and Fair Conduct Programme information sheet before licensing applications open in mid-2023. Licensing applications will be open for approximately 18 months and come into effect in early 2025.Please do not hesitate to get in touch if you have any questions about CoFI or the current consultations.