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Banks and insurers seek clarity on good conduct and licensing regime

24 Nov 2023

| Author: Diana Clement

Financial services businesses are in limbo after a bombshell revelation from the incoming government that it might scrap legislation designed to clean up the conduct of the banking and insurance sectors.

Though passed in mid-2022, after banks, insurers and nonbank deposit-takers and their intermediaries were dragged kicking and screaming to the party, the Financial Markets (Conduct of Financial Institutions) Amendment Act 2022 (CoFI) is not due to be implemented until 31 March 2025. In the meantime, licensing under the Act is open as the sector begins setting up conduct regimes and other structures needed for compliance.

CoFI requires financial services providers to treat customers fairly. Its genesis was the Haynes Royal Commission in Australia, with its revelations of misconduct in the banking and financial services sectors. This was followed in New Zealand by reviews by the Financial Markets Authority (FMA) and Reserve Bank in 2018 and 2019 of the conduct and culture of banks and life insurers, and a further review by the FMA into fire and general insurers. Most large financial institutions are well on their way to complying, say industry organisations representing them, such as the New Zealand Bankers Association (NZBA) and Financial Services Council (FSC).

But then Opposition leader Christopher Luxon announced at the FSC’s annual conference in August that CoFI would be FINANCIAL SERVICES repealed. More recently, this has been confirmed National’s commerce, consumer affairs and revenue spokesman Andrew Bayly. That has left financial services companies and their advisers scrambling. Some are ready to be licensed and others are taking a wait- and-see approach.

Hovering in the background is the Insurance Contracts Bill which, if passed in its current form, will make fundamental changes to insurers’ duties of disclosure, introduce unfair contract terms and change the way insurance contracts are presented to consumers. If the Bill survives, it will shift the power from insurers to the insured.

It is not yet clear what approach the incoming government will take. But neither the CoFI Act nor the Insurance Contracts Bill is on the National Party’s first 100-day action plan. “The new government will have a range of different policy positions,” says Richard Klipin, chief executive of the FSC, which represents life and health insurers and other large financial services companies. “There were announcements made at our conference back in August around rolling back CoFI and we’ve been in conversation to try and understand what that actually means.

“The sector has always been supportive of good conduct outcomes and supporting consumers. But we were also clear that there were issues in CoFI [including] duplication and cost imposts.” Other membership organisations, law firms and professional services companies are recommending members and clients get on with their CoFI implementation.

Malcolm Bruce, partner – consulting at KPMG New Zealand, notes that the current CoFI licensing timetable and obligations remain in force and have deadlines that will require compliance. “Therefore, we’d encourage organisations to continue working on CoFI requirements and to think about how they can truly put customers at the heart of their business operations to systematically treat customers fairly, in a way that works for all stakeholders. We believe this will ensure better outcomes for customers, staff and probably long-term bottom-line results.

Likewise, the NZBA is recommending members crack on. Chief executive Roger Beaumont says, “Banks are working to implement the requirements of the incoming financial institutions conduct regime, including developing their fair-conduct programs.”

Even the Financial Services Federation (FSF), which has been more vocal in its opposition to CoFI, says it realises that member organisations need to prepare for licensing. As Minter Ellison Rudd Watts partner Lloyd Kavanagh puts it, at this stage any repeal is speculation.

Kavanagh says the law is clear, citing Fitzgerald v Muldoon. That was a 1976 Supreme Court decision where then Prime Minister Rob Muldoon was found to have breached s 1 of the Bill of Rights 1688 by issuing a statement on the future of the New Zealand Superannuation Scheme, telling employers not to contribute as repealing legislation was on the way. The court ruled that law changes required legislation and the consent of Parliament and could not be done by press release, as Muldoon was attempting to do.

Kavanagh says if, on reflection, full repeal is thought to be a step too far, certain areas of the CoFI legislation could be “refined” by the new government, including some elements of the fair conduct principles.

For example, the fair conduct principle 446C (2) lists ways of treating customers fairly but this could be made clearer, Kavanagh says. “Instead of saying ‘includes the following’, it would be better to say ‘means’ so we’re not all speculating as to whether there’s something else that’s not in the list.

“Another prospect is paragraph (d) which says, ‘ensuring that the relevant services and associated products that the financial institution provides are likely to meet the requirements and objectives of likely consumers (when viewed as a group)’. While some have no issue with the other limbs [of CoFI] such as paying due regard to consumers’ interests and assisting them to make informed decisions, they think (d) potentially goes too far.”


Clarity needed

Chapman Tripp partner Tim Williams says financial institutions need to know quickly whether changes are intended and, if so, what these are likely to be so the sector has time to prepare. Otherwise, CoFI’s start date might need to be extended. It’s likely that National’s plans are more nuanced than may have been anticipated when the word “repeal” was used at the FSC conference.

“From the National Party announcement and subsequent commentary, it appears that the National Party would wish to wind back the CoFI amendments, rather than repeal them as originally announced,” Williams says. “Of course, much will depend on what the National Party’s coalition partners will agree to, which is currently unknown.”

Williams says if there is a willingness to improve the legislation, the improvements could include:

  • requiring financial institutions to review, monitor and manage employees and assess their compliance against their fair conduct programs, rather than against the nebulous fair conduct principle, so the programs can be tailored to the financial institution’s circumstances, as intended;
  • clarifying the meaning of the fair conduct principle to treat customers fairly, with a clear and complete, rather than openended, description of the objective;
  • having the fair conduct requirements apply only to consumers, rather than including retail clients, so financial institutions which deal with both classes have a consistent boundary;
  • requiring fair conduct programs be developed using a risk-based approach with a suitable materiality threshold, so programs are not burdened with minutiae and unnecessary compliance;
  • not requiring financial institutions to review distribution methods when the distributors are licensed with their own consumer protection duties, which is unnecessary duplication;
  • removing duplication in licensing requirements, such as not asking directors and senior managers to demonstrate they are fit and proper if they have already done so under other licences;
  • limiting the incentives restrictions to targets and thresholds, as the minister announced, and not including additional requirements in fair conduct programs; and
  • exempting genuine training courses from the incentive prohibitions.

Bell Gully partner Blair Keown says few would dispute that the basic idea of CoFI – treating consumers fairly – is a good thing. Uncertainty in the regime as it stands creates risk, however. “As enacted, the CoFI regime involves a tension between a set of prescriptive systems and control requirements, such as the minimum components a fair conduct program requires, and a much broader and more abstract requirement for systems and controls to ensure consumers are treated fairly,” Keown says

“Overseas experience illustrates the importance of ensuring institutions have sufficient guidance to navigate such regimes with certainty. The UK regime, for example, comprises 12 principles that are supplemented by a detailed handbook, guidance notes and other regulator communications.” He says the change in government may provide an opportunity to reflect on exactly what CoFI is seeking to achieve.


In Bayly’s ear

Questions have arisen about which organisations have been in the National Party’s ear to reform CoFI. LawNews has been told it’s unlikely the NZBA was calling for it and the FSA has confirmed it didn’t ask Bayly for repeal. But the FSF’s chief executive, Lyn McMorran, confirms she has been talking to the National Party.

McMorran says it’s no secret that her organisation wasn’t particularly supportive of CoFI from the beginning. “The Bankers Association, FSC, Financial Advice New Zealand, the Insurance Council and ourselves collectively wrote a letter to the then minister [Kris Faafoi].”

Their argument was that reforming multiple laws at the same time, including CoFI, the Credit Contracts & Consumer Finance Act (CCCFA), the Insurance Contracts Bill, as well as yet another licensing regime when the entities were already licensed for their prudential supervision by the Reserve Bank, was not necessary.

“We asked for the CoFI legislation to just be halted until everything else was in place. Then, if there was a gap somewhere in the existing licensing regimes around conduct, let’s look at those and make whatever tweaks are necessary to ensure good conduct and good customer outcomes.

“It wasn’t that we were opposed to the idea of good conduct or good customer outcomes. It was just more legislation and more regulation, more compliance, more licensing, more cost. “Just layer upon layer upon layer, for no real apparent reason. “Our other arguments at the time were that it was badly drafted legislation that was fluffy and woolly around what exactly customer outcomes looked like, and what a fair conduct program was.”

McMorran says the CoFI regime is difficult for small organisations. She cites the example of one credit union member, which has only 13 staff to run its entire operation.


Modernising insurance law

Labour’s Insurance Contracts Bill, once lauded for tidying up curly insurance law issues, was thought by some to be dead in the water with the change of government. But Chapman Tripp’s Williams told LawNews he had heard the bill is “pretty well advanced”, would likely be finalised in December, and would be introduced to the House in the new year.

LawNews put the question to the Ministry of Business, Innovation & Employment (MBIE’s) manager financial markets Tom Simcock, who said the ministry has been considering the issues raised in public submissions on an exposure draft of the Bill. “Decisions on next steps for the bill will need to be discussed with the incoming government,” he says.

The Bill is designed to modernise New Zealand insurance law, some of which dates back to the early part of the 20th century. One major change relates to the duty of disclosure. The onus would shift to the insurer to ask the right questions when the customer applies for a policy, rather that the customer being responsible for telling the insurer everything it needs to know, as at present. But policyholders would be required to “take reasonable care not to make a misrepresentation to the insurer”.

Bell Gully senior associate Sam Hiebendaal says the law is fragmented and outdated and there is recognition that the duty of disclosure and other aspects of the law could be changed. However, the “reasonable care” duty may put insurers in a worse position than they would be under the general law of misrepresentation, Hiebendaal says.

Another important change would be removing the statutory charge that applies to defence costs under the Law Reform Act 1936 and replace it with a right for third parties to make direct claims against an insurer under a relevant policy in certain circumstances, where the insured is insolvent or deceased.

Several parts of the Bill are potentially problematic where there is no strong evidence to show that reform is needed, Hiebendaal says. “For example, the Bill contains a proposal to remove or reduce the existing exemptions for insurance contracts that currently put them outside the scope of the unfair contract terms regime in the Fair Trading Act. “We consider there are good reasons for those exemptions and they should remain.” Unlike other contracts that are subject to the unfair terms regime, the insurance contract is the product itself.

Hiebendaal says it remains to be seen if the Bill will still be introduced to Parliament and in precisely what form. “It was not a policy focus among the parties likely to be part of the incoming government.” ■

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