The CoFI Bill is hardly a best-seller for your Christmas stocking, but it doesn’t come with an exchange card. In this Financial Law Insight we outline the ‘whats’ of the CoFI Bill as we see them: what’s it about, what’s the scope, what are the obligations, what’s our take, and what’s next.
There’s plenty of talking points from the technical drafting in the CoFI Bill, but they can wait till next year. For now, we have taken something of a helicopter view to focus on what we think financial market participants need to know now, before we all head off on our Christmas breaks.
What’s it about?
The CoFI Bill gives effect to the Cabinet decisions made in September 2019, discussed in detail in our October Financial Law Insight.
At its heart, the CoFI Bill is about imposing a licensing regime to regulate the conduct of financial institutions - more particularly, the conduct of banks, insurers, and licensed Non-Bank Deposit Takers (collectively defined as ‘Financial Institutions’ in the CoFI Bill).
The new regulatory regime extends to the intermediaries used by those financial institutions. It has been designed in response to the various reviews of the financial institutions that have taken place over the past couple of years. Those reviews identified a lack of focus on good customer outcomes on the part of banks and insurers, and ineffective systems and controls to identify, manage, and remedy conduct issues.
The CoFI Bill proposes to address the identified issues of concern through the development of a ‘fair conduct principle’. This requires financial institutions to treat customers fairly, including by paying due regard to their interests. The fair conduct principle comes into play whenever a financial institution:
As a concept, the fair conduct principle doesn’t sound unreasonable. However, the way that concept plays out in practice, and the implications of the CoFI Bill, will have a far reaching impact on New Zealand’s financial markets participants, and not just the targeted financial institutions and those involved in distributing their products and services.
What’s the scope?
The CoFI Bill targets financial institutions – banks, insurance, and licensed NBDTs – and their intermediaries. The intermediaries directly captured by the new regime will be those involved in the provision of a financial institution’s relevant services or associated products, where the intermediary knows (or ought reasonably to know) they have obligations under the financial institution’s fair conduct programme.
Largely out of scope of the new regime are financial advice providers (‘FAPs’). Financial institutions’ fair conduct programmes will be precluded from imposing obligations on FAPs in relation to the giving of regulated financial advice, although obligations could be imposed on other FAP activities. In addition, FAPs who act as intermediaries for financial institutions’ services or associated products could be rendered subject to FAP licence conditions to ensure the FAP’s consumer clients are treated fairly. This is a new power to be conferred on the FMA under the CoFI Bill.
That same subset of FAPs who act as intermediaries of financial institutions also face the prospect of needing to comply with incentives regulations if they offer or give incentives in connection with the provision of a financial institution’s services or products. In turn, financial institutions will be required to comply with regulations relating to the provision of incentives, impacting on how they remunerate all intermediaries, including FAPs.
Clearly within scope of the new regulatory regime will be intermediaries who are not FAPs. This will largely capture those relying on exclusions from the application of the new Financial Services Legislation Amendment Act 2019 (‘FSLAA’) regime, such as retailers distributing either consumer credit contracts issued by a bank or NBDT or consumer insurance contracts, as an incidental part of their retail business.
The new regime does not directly target the subsidiaries of banks or insurers by virtue of their parentage – the CoFI Bill only regards an entity as a financial institution if it is a registered bank, licensed insurer, or licensed NBDT. However, the breadth of the definitions of ‘relevant services or associated products’ means those subsidiaries may still be caught up in the new regulatory requirements. They may also find themselves falling within the scope of their parent’s fair conduct programme, discussed below.
What are the obligations?
The headline obligation under the CoFI Bill will be for the financial institutions within its scope to obtain and maintain a market services licence to act as a financial institution. When the proposals for the new regime first came out, much of the focus was on this new conduct licensing concept, dragging banks and insurers into the increasingly murky waters of the Financial Markets Conduct Act 2013 (‘FMCA’). With the introduction of the CoFI Bill, much of the focus now switches to the development of fair conduct programmes and ensuring they are complied with.
The CoFI Bill is largely a framework piece of legislation, as is the modern way. While the CoFI Bill will introduce a new subpart to the FMCA to establish the new conduct regime, most of the detail dictating how the new regime will work in practice will be left to regulation. This makes it hard to meaningfully outline the full extent of the likely obligations that will apply, but at a high level:
It is the fair conduct programme requirements that are likely to have the biggest practical impact on financial institutions and all those involved in providing their products and services. A ‘fair conduct programme’ relates to the policies, processes, systems and controls that are designed to ensure compliance with the fair conduct principles.
The key components of a fair conduct programme are set out in the form of minimum prescribed requirements in the CoFI Bill, with the prospect of further requirements being prescribed by regulation. Best practice in this space will no doubt evolve over time.
What’s our take?
In less than 30 pages of draft legislation, MBIE has created a complex new regulatory regime for financial institutions and those involved in distributing their services and products to grapple with. The fact that FAPs are largely exempt from the direct application of the new rules should not be regarded as a get-out-of-jail-free card, by any stretch. All intermediaries dealing with the products and services of captured financial institutions are going to be affected, one way or another. The full extent of that impact will not be known until we see some draft regulations imposing duties in relation to incentives, but our expectation is that the implications will be profound.
What we find especially interesting is the prospect of unintended consequences. In particular, the new regime proposed for financial institutions creates a real risk of further exacerbating the already uneven playing field between the banks and licensed NBDTs and other providers of consumer finance. If financial institutions extend their fair conduct programmes to their subsidiaries, we then have the prospect of fund manager subsidiaries of a bank or an insurer competing with other fund managers able to operate under a different set of fair conduct rules.
There also seems to be a high risk of consumer confusion in dealing with financial market participants, with different fair conduct rules applying to different types of market services licensees under the FMCA. Things will get even more confusing for intermediaries dealing with multiple financial institutions, who may find themselves needing to comply with multiple fair conduct programmes.
Precisely how these distortions and confusions will play out in practice, and the initiatives that will be undertaken by both MBIE and the FMA to ensure those distortions and confusions do not increase the risk of consumer harm, remains to be seen.
The CoFI Bill will not receive its first reading until Parliament resumes in the New Year. The Bill will then be referred to a Select Committee, at which point the doors will be open to submission on the drafting. That drafting has largely been conducted under urgency and behind closed doors to date, so we expect there to be plenty of room to finesse what has now been released.
Once the CoFI Bill receives its Royal Assent (assuming it proceeds that far, and we have no reason to suspect that this will not be the case) we are likely to see a staged implementation of the new regime, with some aspects potentially deferred for up to two years following the date of Royal Assent.
What this means is that we are unlikely to see the new regime come into effect until some time after 2020. While its impact is likely to be significant for the wide range of financial market participants affected, with all the other reforms set to bite in 2020 that likely delay will come as welcome relief. However, given its significance and lack of public air time to date, constructively participating in the Select Committee process and submitting on the Bill must be a priority for the sector in 2020, if the workability of the new regime is to be optimised.
For now, the Christmas close down period will at least provide an opportunity to work through this very complex piece of drafting to try and make sense of it all, and identify the inevitable intended consequences and practical challenges it is likely to throw up for those affected.
Start a conversation
If you would like a briefing on any aspect of the financial markets and consumer financing regulatory reforms or how to implement and document good conduct processes in your business, or on your financial advice proposition under the FSLAA reforms, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Pauline Ho on +64 9 909 6345, Nick Beresford on +64 9 375 1150, or Megan Mcluskie on +64 4 498 0876, or email the team at firstname.lastname@example.org.