Capital Markets (Conduct of Financial Institutions) Amendment Bill Update

Yesterday the MBIE published details of the Cabinet decisions that have been taken regarding the future of the Capital Markets (Conduct of Financial Institutions) Amendment Bill (COFI) and related regulations. Amendments to the bill will be incorporated via a supplementary order paper, with the aim of passing the bill by mid-2022.

In the context of the recent issues raised by the CCFAC reforms, the willingness to revisit the select committee stage of the bill is positive. However, this may lead some to question again the wisdom of the pace at which the bill was first introduced in the House, which may be a different lesson for future law reform processes. . The regulatory impact statement from MBIE officials from the time the bill was introduced (December 2019) having stated:

Consultation and test This analysis was prepared under significant time constraints, which did not allow time for further consultation with stakeholders on the development and refinement of options. The broader framework of the Conduct Regime has been developed in a short period of time and we anticipate that further refinements may be required through consultation during the legislative process.

The main amendments to the bill at this stage are:

  • restrict the scope of obligations of financial institutions with respect to intermediaries, in particular to ensure better interaction between COFI and the Financial Services Amendment Act 2019 (FSLAA);
  • add a requirement for financial institutions to take into account the possibility that customers may be in vulnerable circumstances when designing their fair conduct programs; and
  • amend the bill to appropriately capture the Lloyd’s insurance market.

With respect to regulations, the Minister has determined that only new minimum regulations are, at this stage, necessary to support the operation of the Bill. The main regulations will therefore be those relating to the decision to prohibit the offer of sales incentives based on volume or value objectives to employees and intermediaries.

The lack of detailed regulations means that the FMA guidelines are likely to be important for those wishing to better understand how to approach their obligations. Of potential relevance in this regard, the FMA CEO noted in a speech this week that the FMA will soon publish an updated draft guide of conduct for consultation. Although this guide is intended for all participants in the financial sector, it is likely to provide insight into the content of the FMA guidance on COFI.

The FMA gave limited details on the nature of the changes to the Guide. However, it appears that its principles may be structured in a manner similar to how the FMA and RBNZ have categorized their comments in conduct and culture reviews. The “four principles” of the revised Guide are:

  1. Treat customers fairly
  2. Governance and Accountability
  3. Effective systems, controls and reporting; and
  4. Identification and resolution of problems.

More details about the amendments to the bill follow. Please contact one of our experts if you would like to discuss the changing driving regulations in more detail.

The role of intermediaries

Initial versions of the bill ensured that intermediaries complied with the principle of fair conduct by imposing on financial institutions (FIs) the obligation to form, manage and supervise the conduct of these intermediaries. However, following comments from the public consultation, there was concern that these requirements are too broad and overlap with the obligations already faced by these intermediaries under the FSLAA and may impose unnecessary burdens on the intermediaries themselves. In response, the Cabinet decided to reduce the obligations linked to intermediaries by:

(a) Remove the obligations of FIs to form, manage and supervise intermediaries. Instead, FIs are required to introduce policies, processes and systems that ensure their distribution systems comply with the principle of fair conduct.

(b) Limit the scope of intermediaries covered by the draft law to those who sell or distribute financial products and/or services to customers, and exclude intermediaries involved in administration or preparatory work.

Introduction of a minimum requirement to consider vulnerable customers in the fair driving program

The bill requires FIs to put in place a fair conduct program to ensure compliance with the principle of fair conduct. The bill contains minimum requirements for these programs, including risk management processes, ongoing training for employees, and process and policy review systems. The Cabinet has decided to include a specific minimum requirement that FIs consider the position of vulnerable customers when developing their fair conduct programs.

Insurance Related Changes

The consultation revealed a concern that the Bill did not adequately cover the Lloyd’s insurance market, due to the unique structure of that market. In response, the supplementary serial will impose minimum obligations of fair conduct on Lloyd’s managing agents, but not on underwriting members. Subscribing members are no longer required to be licensed under the bill.

Cabinet has also decided to expressly provide that insurance contracts are covered by the fair dealing provisions of the Act. As a result, breaches of the fair dealing provisions of insurance contracts will be regulated by the FMA under the Financial Markets Conduct Act 2013, rather than by the Commerce Commission under the Fair Trading Act 1986. here.

Supporting Regulations

The minister has determined that new minimum regulations will be required to support the bill. It agreed to introduce regulations expressly prohibiting LFIs from offering sales incentives based on volume or value targets to employees, agents and intermediaries. This regulation will specify the consequences of the breach of this obligation, including the direct questioning of the civil liability of the managers.

The Minister has indicated his intention to exclude senior managers and executives from the scope of these regulations. The prospect of some form of executive accountability regime in New Zealand, which could include provisions for executive compensation structures, remains on the horizon, however. However, the latest update from the Board of Financial Regulators continues to place the development of such a regime in the “time to be confirmed” category.

Marianne R. Winn