Clare Bolingford, FMA Executive Director, Regulatory Delivery
Speech to the Financial Services Council Conference, 16th August 2023
Tēnā koutou katoa
Nō Ingarangi ōku tupuna
I tipu ake au ki Nailsworth
Kei Whangaparaoa e noho ana
Nō Tūranganui-a-kiwa tōku hoa Tane
Kō Ngāti Porou tona iwi
Kei Te Mana Tātai Hokohoko e mahi ana
Kō Clare Bolingford tōku ingoa
I’m Clare Bolingford and, for those of you who don’t know me, I’ve spent my career in financial services regulation, first in the UK and now in New Zealand - partially thanks to my husband wanting to come home. I’m now the Executive Director for Regulatory Delivery at the FMA with responsibility for our licensing and monitoring functions. I’d like to thank Richard and the FSC for the opportunity to provide this regulatory outlook.
As the theme today is building consumer confidence, I’ll be talking about the essential role the FMA, as a conduct regulator, plays in building that confidence and how we want to work with industry.
I also want to talk to you about our strategic priorities for the year ahead. But to begin this outlook I’d like to start first by looking back on how we arrived at the regulatory environment we’re in today, and reflect on the increasing maturity of the regime here in Aotearoa New Zealand.
I want to talk about our evolution as an organisation, and why we are embarking upon a more systematic approach to outcomes-focused regulation.
A focus on outcomes is just a way of saying we’re focused on results – on ends, not means. And while it might seem like heresy coming from a career regulator, rules, and compliance with rules, are not an end in themselves. They are intended as one part of the means to achieve good results – for consumers, for markets, and for society. And the result we want to see is for businesses to succeed because their customers are treated fairly and can achieve their financial goals.
Our vision is a financial sector that is working well for all New Zealanders.
Regulation in financial services is done best when it is resilient to economic cycles and external shocks. Therefore, it’s important for the design and delivery of legislation to start from high level principles, only introducing detailed prescription where it is necessary for consistency in practices. This enables us all to respond to continually evolving risks, innovation and opportunities that emerge through various cycles.
The Financial Markets Conduct Act took that approach, as has the recent Conduct of Financial Institutions legislation. The FMC Act is now approaching its 10th anniversary, and, to a large extent, the obligations and expectations are well-embedded in the services and firms that it covers. We have chosen to regulate these laws in a flexible, proportionate and collaborative way.
We have also been firm where necessary in enforcing the law.
The FMC Act enabled the FMA to evolve from an enforcement regulator – cleaning up the mess of the finance companies – into a conduct regulator with a range of proactive tools, besides litigation, to influence conduct and investor outcomes into the future.
Looking back to the passage of the FMC Bill through Parliament, this was an era-defining moment for New Zealand. Introducing conduct legislation for the first time was a massive step change. It responded to the conduct gap in investment management that the IMF had identified in its 2007 report on New Zealand’s financial sector. It was also a necessary correction after the dent in investor confidence from those finance company collapses, and that was partially responded to through the Financial Advisers Act.
The new conduct regime was also necessary to ensure standards and protections in New Zealand kept pace with relevant norms internationally. As the IMF had already noted, before the impact of the Global Financial Crisis was evident, New Zealand was an outlier by failing to license and supervise investment firms and financial advisers for both their conduct and disclosure.
If we look at the difference in the investment management sector over the past decade, there are real signs of growing confidence and maturity.
In 2013, KiwiSaver had just over 2 million members. It’s now holding the assets of more than 3 million people. 10 years ago, total money invested was sixteen and a half billion dollars. In our report last year, it was pushing towards $90 billion. That’s a 500% growth in funds - funds already starting to improve the retirement well-being of New Zealanders and helping people appreciate the value of long-term saving and investment habits.
We’ve seen a surge of interest among a new generation of retail share investors in the wake of successful online trading platforms entering the market.
Our latest investor sentiment survey shows investor confidence in the markets has reached 75%, a big lift from last year.
Strong oversight and open dialogue are imperative to nurture this growth, along with the expertise and dedication of the industry professionals, all to promote investor confidence.
Periodic reviews of legislation also help ensure regimes remain fit for purpose. The original Financial Advice regime was reviewed in 2016 and 17 and the new improved Financial Services Legislation Amendment Act introduced, giving more comprehensive protection for consumers and consistency of standards across all providers of financial advice.
The FMA Perimeter – Conduct and Culture reviews
The Financial Markets Conduct Act also established what we call the FMA’s perimeter – the borderline of our formal powers. Most obviously this perimeter boundary is where we see criminal activity that causes harm to the public and erodes confidence in the system – this is why we are so alert to scams and frauds. But our regulatory perimeter also includes key financial services that are unregulated or lightly regulated – as was the case with banking and insurance conduct until the recent reforms.
It’s along this perimeter, as well as in our core remit, that our responsibilities and reach overlap with other regulators – in particular the RBNZ and the Commerce Commission – requiring close coordination and collaboration so that our combined regulatory efforts deliver the best results for New Zealand and New Zealanders. This has been recognised in the formal establishment of the Council of Financial Regulators in the recent reform of Reserve Bank legislation.
So, fast forward four years after the introduction of the FMC Act, to 2018. We defined New Zealand’s response to the Australian Royal Commission jointly with the Reserve Bank, culminating in the Conduct and Culture reviews for Banks and Life Insurers. This revealed another conduct regulation gap in the heart of our system when it came to the conduct of our major retail financial institutions.
We said at that time the issues we uncovered in those reviews were not evidence of the systemic misconduct and harm witnessed across the Tasman, and we maintain that view. But our conclusions were sound – and have been borne out by the significant level of remediation that has been required over the last five years – they were, that banks and insurers had poor conduct risk management and weak systems and processes for identifying and managing poor customer outcomes.
Those reviews also revealed a complacency that firms convinced themselves good intentions alone could result in good outcomes, and saying they were customer-centric would somehow make that happen in practice.
Further investigation following those reviews, led us to use the powers we already have in the FMC Act, under the fair dealing provisions, to tackle misleading and deceptive conduct, and enforce against the most egregious examples of what were, frankly, a sloppy and careless approach to customers. So, since the Conduct and Culture reviews there have been seven civil proceedings, resulting in our largest penalty to date of three and half million dollars.
These cases provide lessons in how the court views the application of the fair dealing provisions in law, and important guidance for firms on conduct, but also the need to invest in appropriate systems and controls.
But all that said, it is critical to understand these fair dealing powers can only be reactive. They exist to correct behaviour where things have gone wrong. These are necessary, but not sufficient, for either preventing poor conduct outcomes or encouraging good outcomes. Licensing and supervision are the best proactive tools we have, to ensure consistent practices across the industry, to mitigate risks before they turn into serious harm for consumers or investors or, indeed, matters requiring our investigation.
With CoFI and the new Financial Market Infrastructure regimes now in place, this brings NZ more closely into line with international jurisdictions, closing conduct gaps and implementing a fully-formed twin peaks regulatory model. Twin peaks is simply where prudential and conduct regulators meet to support a robust, sound, and fair financial system. The important piece is to ensure we work closely and cooperatively where we share a responsibility to supervise and enforce. We want to make sure this is neither cumbersome or clumsy.
From the lessons of the past to our focus on the future
So, having looked back, what has the FMA learned from this progress since our establishment?
Firstly, that this work never stops, and our dedication to promoting investor confidence and ensuring customers are treated fairly is important to the well-being of all New Zealanders.
Secondly, the lessons we have taken from the past are why we have gone through our own substantial changes in both the way we are organised and how we will focus our efforts in future.
And thirdly, that working with industry, collaboratively and constructively, to deliver our statutory duties and to achieve our vision is the only way to make this possible.
As Samantha said when she spoke at the FSC Outlook at the start of this year, the FSC has played a leading role in navigating a period of change through its increased engagement with the FMA and across Government. There is real value to us and your membership in investing time in this engagement and ensuring the regulatory and legislative changes proposed are appropriate.
This is all good context for the next phase of the increasingly more complete, conduct regulatory framework, falling into place as we speak.
Licensing opened for CoFI last month. This is an invitation to start considering applications now and get them in as early as possible –we’re open for business to help through the process.
In March, we collectively achieved a successful transition to the new advice regime. We’re encouraged and heartened by the level of engagement from the advice sector through that licensing process and will be taking the same approach for financial institutions. Recognising the questions for and from banks, insurers, and NBDTs will be different, given the specific requirements of financial institution licensing, including the requirement to establish, implement and maintain a Fair Conduct Programme.
The thread that connects all this is a constantly evolving and maturing framework – and approach – to conduct regulation in Aotearoa, ensuring there is consistency in New Zealand, but also with standards, norms and protections that have existed overseas for a very long time.
The introduction of the Climate Related Disclosures regime is a good example of New Zealand moving from playing catch-up with international standards, to being willing to lead, to deliver the consistency and transparency demanded by investors and markets.
Given that New Zealand has been a pathfinder with these climate reporting requirements, our approach continues to be supportive and educative as we implement the legislation. Most recently you’ll have seen us release a range of tools, resources and draft guidance to help firms meet their obligations.
Our Strategic Priorities
Another thread that weaves these regimes and regulations together is that we are evolving our own approach to supervision and monitoring towards a more consistent focus on outcomes. This is the first of our key priorities for the year ahead.
Along with a successful transition to outcomes-focused regulation, our short to medium term strategic priorities are to improve our understanding of the drivers of market, provider, and consumer behaviour; proactively minimise harmful conduct on the perimeter; deter misleading value propositions and successfully implement the new regimes.
Starting with the new regimes first, I have already mentioned how our approach to implementation is not going to change. There should be no surprises here, the industries we regulate have heard from us about our approach to CoFI and CRD – and this approach will be in line with the new advice regime.
We’re here to listen and to collaborate with firms in an educative way to bring these regimes to life. We don’t expect this to be straightforward. But the more we understand each other and engage through the implementation, the better the outcome will be in the end – for industry, for investors, for consumers, for New Zealand.
So that we can also bring our outcomes-focused approach to life, we will be sharing with you later this year a proposed set of consumer and market outcomes that we think we should all be focused on achieving. We will, of course, be consulting on these. And spending time listening and responding to your feedback.
We reviewed our 2017 conduct guide this year and formed the view that it was still fit for purpose. The overarching principles of culture, controls, capability, conflicts, and communication should still be a consistent compass for all providers of financial services, in all the sectors we regulate.
Like any good navigating compass, this is not a set and forget exercise, and the conduct guide continues to be the lens we use for what a good conduct profile looks like. The new conduct outcomes, that we’ll soon be consulting on, will build on these principles to embed a shared focus.
To be able to achieve this, our second strategic priority is vital – to improve our understanding of the drivers of market, provider, and consumer behaviour. We need evidence, insights and data –collected from firms themselves, from fellow regulators here and abroad – to ensure our approach is robust and meaningful. We will then have an evidence base to decide where to focus our discretionary effort; a feedback loop to evaluate the impact of those actions; and core intelligence data to improve our practice.
Responding to threats and harms on our perimeter remains our third strategic priority. We know that protecting the perimeter is also important to firms, because ensuring it is rigorously policed, supports confidence across the board and recognises the efforts firms have invested in complying with their obligations. No-one wants to see scammers undermining public confidence in a system designed to protect them.
We also understand from our international colleagues that many of these threats are on the rise everywhere – the global surge in scams are crimes that require a coordinated response. Aotearoa cannot go it alone, and neither can we work in silos at home if we want to respond effectively. The International Organisation of Securities Commissions has raised this to the top of its agenda, and so have we.
Challenging unregulated harmful activity when it originates overseas stretches the FMA to the limits of our domestic powers and jurisdiction. Our recent stop order against Validus shows, I hope, that we will do all we can to meet this challenge. We were not surprised that Validus appealed against our decision. We were prepared for this and have welcomed the court’s judgment on the use of our powers. We hope our action sends a signal here and abroad.
Sadly, we know that our enforcement actions alone will not be sufficient to end this type of activity or to protect the public from the blizzard of scams that is confronting them now in social media, online, their phone, or even in their community through word of mouth.
Expect to hear more from us on this in the months ahead, and whenever you can, please share our alerts and warnings, promote our resources, and raise awareness to help people pause, stop, think, and protect themselves before handing their money over to scammers.
Back inside the perimeter, deterring misleading value propositions – our fourth strategic priority – will see us continue to assess inappropriate advertising, value for money, poor disclosure, and increasingly under CoFI, the design and distribution of everyday financial products.
With our four strategic priorities set for the near term, we are looking forward to embedding the new CoFI, financial advice, financial market infrastructure and CRD regimes in the same way we have previously focused on introducing the original conduct regulation to the investment and advice industry. These periods of change take a little time and patience to settle in, but the clear evolution and steady progress of regulatory maturity that Aotearoa New Zealand has achieved to date is well worth acknowledging. I also want to acknowledge and celebrate Aotearoa as an exceptional place to live and work. There are excellent people in this industry dedicated to delivering good outcomes for their customers.
The importance for us in recognising our own story is to appreciate where we can improve and move faster in setting the right direction for the whole financial service sector under our watch. A more resolute and consistent view of outcomes-focused regulation is the best way for us to achieve, what I think we all want to see:
A financial sector that is working well for all New Zealanders.
Ngā mihi nui.