Tēnā koutou katoa. Ko Clare toku ingoa.
Ko taku mahi ki Te Mana Tātai Hokohoko – the Financial Markets Authority.
And thank you to the FSC for inviting me along to talk about a topic I am passionate about – consumer-driven regulation.
Because there is certainly a lot to talk in that space, right now, with much of it relevant to insurance providers.
An obvious issue is climate change, and the global response driven by people calling for “action”. Leading to what we, in the public sector, call “regulation”.
The regulatory response here includes the new Climate Related Disclosure rules, requiring our biggest companies, including many insurers, to disclose their climate impacts.
That’s a great example of consumer change driving regulatory change. Also, of course, reflecting that big institutions were aware of the growing demand for disclosing these risks, and preferred the level-playing field created by a consistent legislative regime.
Another one is the new Conduct of Financial Institutions regime, or CoFI, as it’s known.
Kiwi consumer advocates have long called out what they’ve seen as a power imbalance between an insurer or bank and retail customers, especially when things have gone wrong. Many called for a commission-style inquiry after seeing the systemic failings in Australia. The NZ industry avoided that spectacle here, because the regulators advocated for joint conduct and culture reviews. And those reviews have led to consumer-driven reforms. We are no longer an outlier when it comes to embedding conduct obligations in our financial institutions.
That work has also helped the FMA deepen its understanding of the bank and insurance sectors, and has enabled improved engagement with the industry, in seeking to root out conduct problems and prioritise the interests of customers.
When we asked firms to go and check their business for signs of poor practices, we did find - and in fact are still being informed about – multiple issues negatively impacting customers and some unfair treatment. Many of these have now been fixed and customers put right, but many are still being worked through. And I expect more will continue to come to light, particularly in firms that may not yet have properly tested the areas where harms to customers can occur.
But importantly, our engagement over this period has helped in shaping the kind of industry, and the kind of regulatory principles, that everyone wants to see and should be able to agree with.
So, what is the essence of CoFI?
It’s the prioritisation of a “fair conduct principle” ahead of a more prescriptive approach.
It’s a move away from box-ticking compliance, towards a focus on outcomes including proactive analysis of how products are performing for consumers, not just the business.
It puts the onus on institutions to consider what fairness looks like, and then to formalise that in what’s known as a “fair conduct programme” specific to each entity.
These programmes will need to be approved by the firm’s board before they apply for a financial institutions licence, which they’ll be able to do from next year.
The programmes are intended to inform the entire business as to what “fairness” means – from the design of products through to the handling of claims. And once the regime is in-force, we will be holding insurers to account.
So, staff will know what fairness looks like. And consumers will know what fairness looks like. But we’ve also been told in our research that consumers don’t always know where to go when things go wrong. This is one example that an effective, embedded fair conduct programme should address.
That’s not to say positive change hasn’t already been happening, because it is.
Since our 2018 review of life insurers’ conduct and culture, many providers have been evaluating their products to ensure they’re fit for purpose, and self-reporting any concerns to us.
In that time – almost four years – 225 such issues have been reported to us involving life insurers, many the result of creaking systems and weak controls. Nearly half a million customers have been impacted, and more than $43Million paid in remediation. And that’s just for the one-third of issues whose impacts have been fully assessed.
It’s worth remembering, when we first reported on remediation in September 2019, insurers that had at least undertaken reviews identified 75,000 customers impacted, with a value of around $1.4Million. Last September we highlighted CCRI as a product that has had low or poor value for large numbers of customers, not helped by the way it was sold. The more firms have looked, the more problems they’ve found.
We’ve recently taken action against one life insurer as a result of issues caused by customers not having the right information, or having decisions made for them that weren’t well communicated.
It is highly likely there’s more self-reporting to come as firms continue to look for and find other historic issues. You can reasonably expect our future monitoring activities to consider how well firms have completed, and reported on, these matters.
I want to acknowledge the substantial work done on these problems to date – especially those looking back further than they have to. Many of the boards I have attended over the past 12 months have displayed a greater understanding of what needs to occur – but my message to them continues to be that the completion of conduct action plans is not the end. A more fundamental shift is still needed to bring customer fairness into every aspect of decision-making.
Life and health insurance are long term products, which many people keep on buying for decades – often with the same provider – unquestioningly and faithfully.
But sadly, some customers only find out there are issues with their cover at claim time - which is too late.
That’s why it’s so important features and exclusions are properly understood, as well as how premiums are set. Simply because, if mistakes are made, or information is omitted or hard to find, that loyal customer mightn’t find out about it until they or their family are told they weren’t covered, after all. That’s too late, and it’s not fair treatment.
So greater transparency, better communication and more customer understanding to support those big financial decisions are what I’m hoping to see more of once CoFI kicks in.
Now, to answer the second part of this session’s title: How will these changes affect consumers?
I’ll answer that with another question: What does ’treating consumers fairly’ look like, in practice?
One key part is not subjecting them to unfair pressure or tactics, so they don’t feel rushed into making those important decisions.
It means helping them understand how financial products work; ensuring they know about exclusions, or what could happen if they don’t disclose all relevant information.
It also means giving them the confidence that financial institutions and their intermediaries have the same principles and guidelines in mind, and are actively supporting their financial wellbeing.
I think that last one is particularly important because we know Kiwis have quite low rates of life insurance compared to overseas.
Research by the FSC, a couple of years ago, found 62% have no life insurance, and two key contributors for this were that it’s seen as a low priority, and a lack of trust in insurance companies.
In fact, I was talking with a younger family member recently – someone who has just bought a house, is well-educated, well-paid, and well and truly disinterested in getting life insurance.
When I asked why, their response was “I haven’t given it much thought.” And then: “I don’t know why I need it.”
I’m sure many in this room can think of a few reasons why they’d benefit from life insurance; an obvious one being the fact they’ll be covered later for any issues that may arise as a result of the typical 20-something Kiwi lifestyle.
But my relative isn’t hearing such reasons. And I suspect many more Kiwis aren’t either.
Which may indeed be a potential downside of regulation for consumers: the right conversation aren’t happening at the right time.
We know, for example, that there’s been a drop in over-the-counter sales of insurance at banks, perhaps in part because staff are worried about the consequences of getting the conversation wrong.
So, there is the risk that consumers don’t have good access to quality advice, or good conversations, about products that may be suitable for them at the right time.
To which I’d say this: that’s not the intention of conduct regulation, at all. Quite the opposite.
Put simply, ‘treating consumers fairly’ means equipping staff and advisers with the right information to enable good conversations, but also ensuring it’s done with the consumer’s interests at heart.
That’s one reason we’re working so hard to get our intermediated distribution guidance right – to ensure providers and their intermediaries are all behaving in a way that’s consistent with the fair conduct principle. And we will continue to engage with industry to focus on how to most effectively embed the regime over the next 18 months.
One of our priorities is to continue building our understanding of consumers in the sectors we regulate – and we will share those findings.
We’ve recently completed our first major survey on consumer behaviours and attitudes towards financial services, and two of the key findings that stood out for me were this:
Only 31% of people are confident in knowing what to do if they experienced unfair treatment. While, on the other hand, 70% of insurance consumers were satisfied with their insurer, and the top three drivers of this were
- that they provide a good service,
- that they’re fairly priced; and
- that they’re easy to deal with.
So, two key points here. Three out of ten of your customers aren’t satisfied. It’s great that seven out of ten are, but how do we get the other three out of ten over the line? In a product sold to hundreds of thousands, if not millions of people, that’s a lot of people who aren’t satisfied.
And that consumers are pretty clear on what they want. What they expect.
And that’s what’s driving regulatory change in New Zealand’s financial sector.