23 August 2022

Banks and insurers have work cut out with CoFI

Clare Bolingford, Director of Banking and Insurance landscape

Clare Bolingford, Director of Banking and Insurance Conduct, Financial Markets Authority

It is the job of financial institutions to manage financial risks and provide suitable products and services to customers. Most are good at this and recognise that balancing broad stakeholder interests is important to remain sustainable and for our financial system to function properly.

The way they do that is crucial, though, and we know some haven’t always been focused on ensuring the customer is getting a fair deal.

Our reviews of conduct and culture at banks and insurers in 2018/19 found a number of conduct issues and a lack of proactivity in identifying and fixing them.

Financial institutions have made progress since then, investigating and self-reporting their mistakes – which are usually, but not always, due to legacy products and systems – resulting in millions of dollars being paid back to customers in remediation.

However, there’s still more to do to prevent these kind of failings in the future.

That’s why, in June this year, the Government passed the Financial Markets (Conduct of Institutions) Amendment Act – also known as the Conduct of Financial Institutions, or CoFI, regime.

It applies to the roughly 100 registered banks, licenced insurers and non-bank deposit takers (such as credit unions) who provide products and services to Kiwi consumers, and requires them to be licensed in respect of their general conduct towards those consumers.

While the new regime doesn’t kick in until 2025, it’s critical providers start preparing now.

Fairness over time

Until now, New Zealand lawmakers have focused on ensuring fairness at the point of sale: whether the consumer was misled or deceived when buying a product or service.

The intention of CoFI is to cover the entire lifecycle of a financial product, which for something like health insurance can literally mean from the day you’re born to the day you die. And the overarching requirement for institutions to ‘treat consumers fairly’ is paramount throughout.

That means institutions must help consumers make informed decisions, act ethically and transparently, and not subject them to underhanded tactics or undue influence.

At a product level, like a new insurance policy or loan, it begins with the design; those creating a product should constantly be asking what type of consumer the product is suitable for.

It applies at the point of sale, where financial institutions should think about whether the product is right for the consumer rather than selling to just anyone.

And it remains front of mind post-sale and throughout the customer relationship, particularly when consumers need clear information or when dealing with a claim or complaint.

Put simply, CoFI requires those 100-odd institutions to prioritise fairness  in their strategy.

Designing a fair conduct programme

The new regime introduces a “fair conduct principle” that requires them to treat customers fairly.

Exactly how each institution decides to apply this to its business will need to be written down in what is known as a fair conduct programme, or FCP.

These will include policies, processes, systems and controls that are designed to ensure compliance with the fair conduct principle. For example, how services and products will be provided in a way that is consistent with that principle; who has ultimate accountability if they aren’t; and how consumers and employees will be able to report any complaints or concerns about their conduct.

They’ll be proportionate to the institution’s size, strategy, culture, product range and customer mix – so, for example, a large bank’s FCP will look different to one for a small credit union (or an insurer for that matter).

Firms will need one drawn up by the time they apply for a financial institutions licence, likely from next year, so by then they’ll have a fairly good idea what fairness means to their business.

They’ll then need to embed those programmes into their organisational DNA – a task that will require the nearly 40,000 people who work in the industry to understand what it means for them.

Once the new regime starts, those fair conduct programmes will need to be reviewed and maintained to ensure they stay fit for purpose, and respond to issues raised.

The desired result is firms putting fair customer treatment at the heart of their business and dealing with any mistakes quickly.

The cup is already half-full

The good news is that a lot of the positive change CoFI requires is already taking place. We’ve seen significant progress made by industry since our first conduct and culture review, of banks in 2018, and life insurers the year after.

We’ve seen entities completing or being close to completing subsequent action plans, and embedding this work into their daily business. We’ve seen greater identification of conduct risk before harm occurs. We’re also seeing entities and their boards being generally engaged in conduct and culture.

As I said at the start, though, there’s still a lot of work to be done.

It’s time for them to enact a culture shift – from board-level through to customer services – away from pure compliance with the law, towards an authentic concern for good conduct and positive outcomes.

We want guardrails added to stop consumer harms, which may come in the form of product design and effective testing and targeting of consumers, and reviews to ensure things work as intended.

And if a problem is detected we want them remedied in a timely and fair manner. It’s not good enough just to “get around to” it in a couple of years, with ongoing costs to consumers in the meantime.

Our focus is on ensuring harms are stopped, and if it does it occur the situation is put right in a timely manner. That work will never actually be finished.

Kiwi consumers will be better off for it, as will staff at financial institutions, who’ll be able to focus on what they do best: delivering for customers.

What’s more, I think institutions will be better off over time, too, simply because well treated customers are crucial for a sustainable business. 

For more about COFI see: Conduct of Financial Institutions (CoFI) legislation