Employment law impacts of the CoFI regime from 31 March 2025
The Financial Markets (Conduct of Institutions) Amendment Act 2022 (CoFI Act) introduced significant changes to the regulatory landscape for certain financial institutions in New Zealand (registered banks, licensed insurers, licensed non-bank deposit takers and each of their intermediaries). Passed into law on 29 June 2022, the CoFI Act’s regime and associated Financial Markets Conduct (Conduct of Institutions) Amendment Regulations 2023 (Regulations) came fully into force on 31 March 2025.
The CoFI Act and Regulations aim to enhance consumer protection and trust in the financial sector. In doing so, the new standards have a number of employment law implications within the sector. These impacts include:
1. Incentive Regulation, Remuneration, and Performance
The Regulations prohibit the payment of incentives (such as bonuses) based on volume or value targets or thresholds. An incentive is prohibited “if a person’s entitlement to the incentive, or the nature or value of the incentive, is determined or calculated in any way by a direct reference to a target or other threshold that relates to the volume or value of the services or products.”1
Helpfully, the Regulations provide examples of what is, and what is not, a prohibited incentive:
Example one
The employee of a life insurer is offered a USD1,000 bonus for selling at least 100 life policies in a 3-month period. The bonus is a prohibited incentive because the employee’s entitlement to the bonus is determined by way of a direct reference to a sales target.
Example two
An employee (A) receives an annual bonus calculated on a sliding scale. The bonus is calculated as the aggregate of 0.5% of A’s base salary for the first USD10 million in customer funds invested in a particular product based on A’s recommendations, 0.75% for amounts over USD10 million, and 1.00% for amounts over USD20 million. The bonus is a prohibited incentive because it is determined by reference to thresholds directly referencing the volume of the relevant services or associated products sold.
However, an incentive is not a prohibited incentive if the person’s entitlement to the incentive, or the nature or value of the incentive, is determined or calculated on a linear basis (that is, on a per service or per product basis); and is not determined or calculated in any way by a direct reference to a target or other threshold that relates to the volume or value of the relevant services or associated products.
An example of an incentive that is not prohibited is:
An employee (A) is paid a commission for each insurance contract that A arranges, calculated as 5% of the first year’s premium for the contract. The percentage does not depend on any target or threshold (that is, the percentage does not change based on the volume or value of contracts).
The incentive is not prohibited because it is determined or calculated on a linear basis only (that is, on a per service or per product basis as a fixed percentage of the premium).
As employment agreements cannot contain anything contrary to law, remuneration clauses which include newly prohibited volume or value incentives will need to be re-visited (if not already) to ensure legislative compliance. This also includes amending internal policies referring to newly prohibited incentives.
Institutions must monitor and report on their performance against customer outcome metrics. Because of this, internal performance policies and KPIs will need adjustment to ensure employees are measured against objective ‘customer outcome’ metrics.
2. Role Diversity, Training, and Management
The requirement to establish ‘Fair Conduct’ programmes means associated training resources for employees are a key consideration. Of particular note is the increased compliance and reporting requirements. Comprehensive, role-specific training on the requirements will be essential in ensuring compliance. The programme, and associated training will likely be based on (but not limited to) product and service design, sales and service, complaints, claims handling, and ‘treating customers fairly’. This will of course be supported by Management with comprehensive understanding of organisational obligations and policies.
The CoFI Act’s licensing requirement with the Financial Markets Authority (FMA) necessitates additional administrative and compliance roles. It will likely lead to the creation of new roles focused on compliance, risk management, and internal auditing. If not already implemented, sector employers will likely want to establish clear lines of reporting, clarity of duties, best practice, complaint, and troubleshooting processes/guidelines.
3. Hiring, Skillset Demand, and Culture
With the new regime, financial sector employers may see increased hiring demand for employees with regulatory, training, or programme implementation experience. Customer service and relationship management roles will also become more critical. Hiring individuals who can ensure positive customer experiences and outcomes will help establish success in the new regulatory climate. It appears likely that sector employers will also experience an internal ‘culture shift’ which will promote further emphasis on their pre-existing ‘fair conduct’ and ‘customer centred’ outcomes.
While the FMA has worked closely with sector employers on the CoFI Act regime, how it will operate in practice and the unforeseen flow on effects, are questions to be answered in the upcoming months. Should navigating the new climate as an employer raise questions, our Employment Team can assist providing commercial and strategic advice on the matter.
1Financial Markets Conduct (Conduct of Institutions) Amendment Regulations 2023, regulation 237E(1)
