CoFI — FMA releases proposed guidance on intermediated distribution
The Financial Markets Authority - Te Mana Tātai Hokohoko (FMA) has released for consultation proposed guidance for the incoming regime under the Financial Markets (Conduct of Institutions) Amendment Act 2022 (CoFI). The guidance covers the FMA's expectations when certain financial institutions distribute products and services through intermediaries.
The financial institutions subject to CoFI are registered banks, licensed insurers, and licensed non-bank deposit takers that provide certain services, including acting as an insurer, being a creditor under a consumer credit contract and other retail financial services.
CoFI requires those financial institutions to obtain an FMA conduct licence and comply with a high-level "fair conduct principle" to treat consumers fairly. Financial institutions must also establish, implement and maintain effective fair conduct programmes to ensure compliance with the fair conduct principle.
The FMA previously released an information sheet to assist financial institutions when developing fair conduct programmes.
Who is the guidance for?
The guidance is for financial institutions and all third parties involved in the sale and distribution of financial institutions' services and associated products to consumers, regardless of whether the third party meets the definition of "intermediary" or "agent" under CoFI (in the guidance and this article, these third parties are referred to as intermediaries). For example, intermediaries include mortgage and insurance advisers, motor vehicle dealers selling vehicle finance and insurance, and online investment platforms.
Under CoFI, the fair conduct principle applies to financial institutions when intermediaries are involved in the provision of financial institutions' services and associated products. Fair conduct programmes must also provide for intermediaries' distribution methods to operate in a manner that is consistent with the fair conduct principle.
What does the guidance say?
Below we highlight some of the FMA's expectations for distribution methods under CoFI.
- Flexibility - CoFI is a principles-based regime and, as such, financial institutions have flexibility to design distribution methods consistent with the fair conduct principle. The FMA has indicated that financial institutions should take a risk-based approach to developing distribution methods, considering the nature of their business, the services and products they offer, and the types of intermediaries they use.
For example, financial institutions could decide not to impose some obligations on licensed financial advice provider intermediaries as they are subject to separate conduct obligations.
- Proportionality - The FMA expects distribution methods to be proportionate and tailored to the business of each financial institution. In the guidance, the FMA noted the concern that CoFI's distribution requirements may result in new onerous and costly compliance measures for financial institutions and intermediaries. The FMA reiterated that financial institutions can comply in a manner proportionate to the level of risk of their consumers not being treated fairly.
For example, the FMA recognised the use of attestations as a means of supporting compliance with CoFI's distribution requirements.
- Fairness is a shared responsibility - The FMA intends for CoFI's obligations to be shared between financial institutions and intermediaries. Ultimately, the FMA expects financial institutions and intermediaries to have consumers at the heart of their respective businesses and work together to ensure consumers are treated fairly.
The FMA also set out steps that it does not think are necessary to comply with the CoFI distribution requirements, including:
- Constant surveillance of intermediaries (although fair conduct programmes and distribution methods should be reviewed regularly);
- Monitoring individual instances of advice or individual sales;
- Financial institutions supervising intermediaries' legal compliance; or
- Financial institutions requiring intermediaries to obtain annual external audits or independent assurance reports.
The guidance is a helpful clarification of the FMA's expectations for financial institutions when developing fair conduct programmes alongside intermediaries.
Importantly, the guidance emphasises that CoFI's obligations should be risk-proportionate and shared between financial institutions and intermediaries. In our view, this is important to manage the compliance burden of the CoFI regime.
We also consider that the guidance will be useful to other financial institutions, including non-bank fund managers not currently subject to the CoFI regime, to understand the FMA's expectations regarding intermediary interaction.
The consultation is open for submissions until 14 April 2023.
Following this, the FMA will be accepting CoFI licence applications from 25 July 2023.
Please get in touch if you would like further information about the incoming CoFI regime or current consultation.