24 August 2022

'5 mins with the FMA' podcast #2: Conduct of Financial Institutions (CoFI)

'5 mins with the FMA' podcast #2: Conduct of Financial Institutions (CoFI)

FMA Director of Banking and Insurance Conduct Clare Bolingford discusses the incoming Conduct of Financial Institutions (CoFI) regime, which will require New Zealand's retail banks, insurers and non-bank deposit takers to treat customers fairly at all stages of the relationship.

Here she outlines the key changes CoFI will bring about, what treating customers ‘fairly’ means in practice, and what firms can do now to prepare before CoFI comes into effect in 2025.

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Host: Kia ora and welcome to “5 minutes with the FMA” – a podcast by the Financial Markets Authority - Te Mana Tātai Hokohoko, where we take a quick look at financial regulatory matters in New Zealand.

Our Director of Banking and Insurance Conduct, Clare Bolingford, is here to talk about the recently-passed Financial Markets (Conduct of Institutions) Amendment Act, which paves the way for the Conduct of Financial Institutions (or CoFI) regime.

Clare, who does this apply to, and what key changes will it bring about?

Clare Bolingford: So the CoFI regime applies to banks, insurers and non-bank deposit takers, but only those who serve retail customers. And in terms of what key changes it will introduce, there is a principle these firms need to consider which is ‘treating their customers fairly,’ that is the main focus that they need to give to their business.

So they need to develop and they need to implement a fair conduct programme to demonstrate how they will treat customers fairly, and they will also need to be licensed by the FMA, so they need to develop that programme first in order to apply for a licence.

And they will also need to comply with regulations that will be made by the government, which include a ban on target-based sales incentives, and also will include how to levy for the licence fee.

Host: Right, so what does ‘treating customers fairly’ mean in practice?

Clare Bolingford: What treating customers fairly looks like in terms of what firms need to think about is they should be paying due regard to the customers’ interests and they should be acting ethically, transparently and in good faith at any point that they deal with a customer.

It’s also going to be really important that they don’t subject customers to unfair pressure or tactics or undue influence. So what we sometimes see in the sales process, for example, is customers feel under pressure to make a decision, and that’s something that we feel actually firms should not be doing.

Some of the other outcomes we are seeking is that consumers are able to access products and services that are suitable for their needs. It’s about them being supported in the financial decisions that they’re making and able to make good decisions.

And it’s also about the financial institutions putting customers really at the heart of their business as well, so really considering not only what their product set is, and how they can sell more of that product, but what’s best for the customer and how can they support their financial wellbeing better.

Host: Okay, so what can be done now to prepare for the CoFI regime?

Clare Bolingford: What financial institutions should be doing to prepare is that they should be thinking about what their fair conduct programme will contain, and start focusing on the changes that they’re going to need to make in their business to make sure that they are ready for when the regime comes into force in early 2025. This might require more cultural change, for example, which we know does take time to give effect to.

They will need to apply for a licence, with the FMA. That’s likely to open towards the middle of next year, and we will provide more guidance in the run-up to that so that they’re able to understand the process they will need to go through for that.

Their Fair Conduct Programme will need to be signed off by their Board, we know that can sometimes take some time in order to prepare for that process, so it’s a really good idea to start thinking now about how they’re going to plan for both compliance with the regime but also for that licence process too.

Host: And what will those fair conduct programmes look like?

Clare Bolingford: I’m expecting them to be quite different depending on the nature of the financial institution themselves. So you can imagine for a large banking group, for example, a fair conduct programme might not even be one document, it could be made up of many different aspects of how the bank ensures that their customers are treated fairly; there will be different policies within there. However, for a smaller insurer, for example, or a credit union, it will be a very different type of programme, where they probably will be able to contain the elements that they need within the fair conduct programme in a much smaller format.

Host: Okay so fast forward to 2025, what would you ideally like to see?

Clare Bolingford: So what I would like to see from these financial institutions is that customers are at the centre of their strategy. So I absolutely appreciate that firms needs to make money, they need to do that in order to be sustainable, and frankly we wouldn’t have a financial services industry supporting the financial needs of New Zealanders if they weren’t able to do that. But at the moment there isn’t enough focus on the customer and how the customer is supported through the lifecycle of the relationship with the firm, and so what I would want to see in the future is the customers feel they are getting a great service and that when problems do arise they are treated fairly.

Host: Thanks Clare. That’s Clare Bolingford and this has been another “5 minutes with the FMA”. There’s more on the CoFI regime on our website – at FMA.govt.nz/legislation – and there’ll be more to come about it on our Linkedin feed, so be sure to follow us there. Thanks for listening. We’ll bring you more FMA insights next month. Till then, hei kōnā mai – bye for now.