FMA signals proactive use of CoFI powers and board-level engagement

As part of its appearance before the Finance and Expenditure Committee’s inquiry into banking competition, the Financial Markets Authority – Te Mana Tātai Hokohoko (FMA) has outlined how it intends to supervise financial institutions under the Conduct of Financial Institutions (CoFI) regime. Drawing on themes from its recent Fair conduct programme insights report, the FMA signalled an increasingly outcomes-focused and proactive regulatory stance.

Background

Following its written submission in September 2024, the FMA recently appeared before the Finance and Expenditure Committee as part of the Committee’s inquiry into banking competition.

FMA Chief Executive Samantha Barrass and Board Chair Craig Stobo were asked a series of questions relating to the FMA’s regulatory remit including applying CoFI and outcomes-focussed regulatory approaches. The session also addressed regulatory burden and ‘dual-hatting’, including the use of exemptions and sandboxes. Some answers given elaborate on existing FMA guidance and the recently-released Fair conduct programme insights report.

This update provides a snapshot of particularly notable signals by the FMA in its responses during the oral submission:

• The FMA intends to use its new supervisory powers under CoFI proactively rather than reactively – for instance, through regular attendance at meetings at the Board level (where conduct risk should be considered and reported to per the recommendations in the insights report). Ms Barrass assured Green Party co-leader Chlöe Swarbrick that it is the FMA’s view that supervisory powers are effective in creating expedient change:

“because investigations take a long time and it can take a very long time for customers actually to get the benefit of it. So, what we look for is to use our engagement with the banks to get them to very quickly make changes that we’re looking for”;

• In the same line of questioning on CoFI, Ms Barrass confirmed that the FMA would closely monitor the time taken by banks to pass on changes to the Official Cash Rate (OCR), considering practices in other jurisdictions to assess fairness. Mr Stobo clarified the FMA would be looking at OCR changes both in terms of increases and decreases in its analysis of time taken to pass on to customers;

• The FMA is particularly focussed on systems and controls – particularly with regards to security systems and software. The FMA give the example of incorrect application of multipolicy discounts arising as a consequence of firms’ system failures;

• Ms Barrass’ view is that the New Zealand financial services regulatory environment is relatively ‘light touch’ compared to other jurisdictions, particularly the EU. When challenged by National MP Daniel Bidois who reflected other submitters views that the New Zealand regulatory environment is difficult to understand and therefore comply with, the FMA pointed to its use of exemptions to take into account firms unique positioning and product offerings to avoid a “race to the bottom”;

• The FMA also brought to the Committee’s attention various recent ‘hot topics’ including strong industry pushback on its initial outcomes-focussed consultation draft, recent changes to CRD requirements to exclude smaller firms as an example of its adaptive approach to reducing regulatory burden, and fintech sandboxes.

Our view

The FMA provides notable signals in its oral submission on its approaches to conduct regulation and outcomes. Particularly, the FMA has indicated its preference for engagement at firms’ board level on a regular basis and that it will use its supervisory powers proactively with the intention to drive expedient change.

If you have any questions please get in touch with Rachel Taylor, Tom Barnes, or your usual DLA Piper advisor.