FMA – the year ahead
Financial Services Council breakfast event – 4 February 2020
(Notes may differ slightly from speech as delivered)
Good morning.
A few people remarked that my usual sunny disposition had deserted me when I spoke at the FSC Conference [last year] and that I was decidedly grumpy with the industry – or at least the life insurance part of it.
I was, and the decision to let my frustration show was a deliberate one.
Once the government had tabled its draft legislation to recalibrate the degree of regulation to which banks and insurers would be subject, I mentioned to Richard [Klipin] that perhaps it was the right time for a change of tone.
We agreed that I would find an opportunity to reset a bit before Christmas or soon after the summer break. I had in mind a short session with some industry leaders to lay out the way forward – over a coffee perhaps.
Well here we are, 200 of you, and the media, and me with a 20 minute keynote speech to deliver. “That’ll learn me”, as they say where I grew up.
Anyway, I hope you are all imbued with the optimism and energy that comes with a summer break…unless you live in Wellington of course, which had a break without any of the summer.
What I plan to do today is to lay out the FMA’s priorities and focus areas for the coming year. Also to point very clearly and deliberately to my preferred route through the coming months (and possibly years), for the banks and life insurers in particular. Lastly, but in many ways first, I want to reinforce that the new financial advice regime and licensing framework is a massive priority for us.
Priorities for 2020
Our strategic priorities for the year ahead reflect the focus on our regulatory remit and the regulatory landscape for financial services as a whole. They reflect the expansion of the financial advice regime beyond AFAs and QFEs, and they reflect the focus on the big consumer beasts of retail banking and insurance.
They also reflect the key parts of our mandate that are not specific to insurers or banks or financial advisors – capital markets and investor decision-making.
Lastly there is the critical topic of how to work together to navigate some uncertain waters and to design a consumer-facing financial services landscape that echoes the investor-focused capital markets regime that the FMC Act put in place.
Strategic Risk Outlook/Corporate Plan
In July last year we set out our strategic priorities for the year ahead in our Strategic Risk Outlook and the associated work programmes in our Annual Corporate Plan.
We tweaked these from previous iterations but fundamentally they are consistent with those we articulated in 2015 and 2017.
You can see that we focus both on our role regulating financial services providers and on encouraging informed participation by investors and consumers in our financial services markets.
In turn:
Governance, culture, systems & controls sit with the providers – the sell-side.
Investor and consumer decision-making reflect our role working with the buy-side – the people on the receiving end (if you like) of financial services. And the people who can be forgotten or taken for granted if we are not all watchful.
Trust in capital markets reflects our role regulating securities markets and all that goes with them. I refer to exchanges, market conduct, financial reporting, audit, corporate governance. Plenty in there for a markets regulator to be working on.
Credible deterrence of course reflects our work in investigating potential breaches of the law and seeking to hold those responsible to account. This is a critical component in effective regulation and something I’m going to comment a bit further on later.
And lastly, remit changes (both those already passed into law and those currently proposed).
I don’t need to tell you, but nothing stands still in our world. I’ll cover that later too.
Current focus areas
So that’s the strategic priorities we have laid out for you.
I think there are some significant areas of work – either in sheer scale or in their developing importance – worth commenting on.
Some of this is relevant for only some of you, but that just reflects the broadening spaces that we are operating in and the challenges of allocating resource across them.
Financial advice licensing
The new financial advice regime takes effect from the end of June.
We already issuing transitional licences to advisers. I suspect it still feels like early days but I encourage advisers to apply now rather than wait until last minute.
We are working closely with MBIE, the Code Working Group and the Companies Office to help advisers transition. Our initial focus is helping and supporting advisers.
The objective of the legislative changes was to increase access to quality advice – by ensuring there are common minimum standards of competence and conduct for anyone calling themselves a financial adviser or a provider of financial advice.
This is a huge priority for us – designing the full licensing regime, working out how to monitor and supervise a very diverse sector. We know that there are some in the already-regulated part of this community with strong governance and processes who will sail through licensing and afterwards. We also know there are many needing to make tough and important decisions about their business models and whether to get licensed or to sit under someone else’s licence. Some of those will need to make major changes in how they deliver and document their advice, and get used to being regulated.
KiwiSaver
We signalled last year that we’d be looking more closely at how providers are delivering to members – and whether that measures up to what was promised.
As part of that we are seeking to develop a better understanding of the different investment styles – such as active and passive – and to focus attention on whether KiwiSaver members are getting what they pay for.
I’ll talk about green-badging or “green-washing” in a moment.
In terms of investor engagement, our work on annual statements continues – how to use these as an entry point for some KiwiSaver members to engage with their savings and their retirement planning.
After pushing for dollar amounts of fees to go on statements, we’ve been supportive of the move to put projections on there also. We worry about what assumptions are to be used of course, and how to balance comparability with distinct features of some schemes.
But we know from research that this form of information is useful to investors and prompts action – whether it is to increase contributions, change the type of fund they are in or change providers.
Obviously, the outcome of the KiwiSaver default mechanism review will be important, and the recent report from the Retirement Commissioner has certainly prompted up some policy decisions to be made by the government.
Sustainable finance/ESG
Beyond KiwiSaver, we also want to take a look at investments branded as green or ESG. Like everywhere else, we’re seeing greater demand from investors for these types of investments. We also see the focus on how the finance sector can assist in shifting the global economy to a more sustainable footing.
Part of our work here is about ensuring people understand what they’re investing in and that they get what’s labelled on the tin. Just calling a product green or responsible, or labelling it sustainable finance without any proof or any sort of contractual commitment risks a mis-selling charge.
We are mindful of the MBIE/MfE consultation on climate-related disclosures, and wherever that lands we will be looking to ensure that listed issuers consider the risks (and opportunities) to their business models and profitability from climate change.
CoFR (the Council of Financial Regulators) have set out as one of their objectives that the group of financial regulators and policy-makers involved should contribute to transitioning to a low-carbon economy. So sustainable finance is a key product area for us and CoFR has a specific multi-agency workstream underway on it.
AML – FATF review
This year, the Financial Action Task Force will be testing the effectiveness of New Zealand’s compliance regime for anti-money laundering and countering the financing of terrorism.
FATF is the global standards-setter for AML/CFT and the results of their reviews are looked at carefully by those looking to do business in New Zealand.
Our readiness is looked at both by those who want to see high standards before they do business here and those who are seeking the weakest link in the AML/CFT chain. We do not want New Zealand to be that weak link.
Regulating conduct
So I want to take a step back and say a few words about what we mean by “regulating conduct”.
The FMA is a conduct regulator. Our main piece of regulation, the FMC Act, has conduct in its title.
But, I think the word can mean different things to different people and our approach to “conduct” requires a little explanation.
We flagged our expectations from the earliest days of the FMC Act back in 2014. We consulted on and issued our conduct guide in early 2017.
As I have remarked before, outside of the directly regulated (ie FMA-licensed) sectors, it felt to me that there was surprisingly little discussion and reaction across the industry.
It took the Australian Royal Commission and NZ’s Conduct & Culture Reviews to put a broader spotlight on the meaning of “good conduct” and how to deliver to the needs and benefits of customers.
The most critical point I can make about conduct is one I have made before:
Poor conduct and poor treatment of customers is most often about sloppiness – lack of process, lack of training, poor systems etc. It is relatively rarely, at least in licensed and regulated financial services, about deliberate wrong-doing.
Obviously, where it is or we suspect it is, we’ll go after it and so will other regulators.
But poor processes, product design, complaint-handling, incentive structures – all of these are culpable.
Reckless or lazy disregard for the needs and interests of customers and investors is not acceptable. It’s why we talk about governance, culture and controls.
It’s why we have recommended to the government that the new conduct legislation allows us to look for these things and to force providers to improve them – including in cases where we cannot see or prove the harm to investors or customers has already happened.
Resourcing and remit change
I’ll comment here on the need to adjust our capability and resource to cover the existing remit.
You will have seen the consultation paper on our funding needs for the immediate future – bearing in mind in particular the need to license and monitor an expanded financial advice sector, and the increased expectations of the public as to what the markets regulator is able to deliver…and at what speed.
And that’s ahead of any conversation about the significant expansion contemplated in the CoFI (Conduct of Financial Institutions) bill and the insurance contract law review.
FMA’s operational capacity and funding
Our last funding review was conducted over 2015/16.
So we were due a new review around now. We weren’t funded at that time for the work we have already done on financial advice nor for the major exercise ahead of us.
And the last review did not foresee (and therefore did not fund) the major piece of work to undertake Conduct & Culture Reviews of retail banking and life insurance. Work which is still ongoing.
We have used our existing funding and reserves to cover those pieces of work and the surge in big ticket litigation cases.
We have put forward a number of potential funding scenarios to the government and sought to explain what could be done under each scenario. MBIE and the FMA issued a consultation paper last week, which lays that out. As part of that work, MBIE commissioned an independent review on whether we are doing a good job with the money we are given – 75% from industry, 25% from Crown.
PwC have issued their independent report, which is available alongside the consultation paper. I would summarise that as indicating that the FMA punches above its weight in terms of its budget and resource, but is under-resourced in some key areas.
A strong and vibrant financial sector needs an effective regulator and that’s what we want to be. I would encourage you to review the options and have your say.
If the Conduct of Financial Institutions legislation proceeds as planned, there will likely be another consultation on related funding/resourcing at some point in the future.
Working with other regulators
One of the key features of the strategic priority on remit change is the need to work closely with other financial regulators and the broader government ecosystem.
The framework for regulation of financial services is getting a broad overhaul. The Reserve Bank Act review, the IPSA review, financial advice changes, banking and insurance proposals, the CCCFA changes, insurance contract law, Financial Market Infrastructure bill…and I bet I’ve missed a few.
Some of the changes either overlap with or potentially distort other moving parts. So the regulators and the policy-makers working closely together will be key.
Both directly and through CoFR, our relationship with the RBNZ has never been closer. The work on the joint reviews of banks and insurers was a game-changer in terms of our collaboration. It created a new model for joint work and information-sharing.
With the Commerce Commission joining CoFR, we have already started a similar sea-change. CoFR now has the three primary regulators of financial services and the policy-making bodies in Treasury and MBIE.
Different members have different priorities and remits, but the work plan published at the end of last year by the CoFR members is relevant to all of us and certainly consistent with the FMA’s areas of focus. The work streams are:
- Climate change
- Financial inclusion and consumer engagement
- Conduct and governance
- FinTech
- Residential property insurance
- Credit unions
- Review of the regulatory system charter
It will be a major challenge to co-ordinate and flex the various proposed changes and to achieve a coherent legislative framework for the regulation of financial services. We have asked Liam Mason to spear-head that co-ordination on behalf of CoFR. Given Liam’s seniority and experience across financial services, I think that aptly demonstrates how important the issue-spotting and co-ordination will be.
Credible deterrence
A word on our investigation and enforcement work. This is of course a critical part of our toolkit.
We’ve all been told that the carrot is more effective than the stick. But without a big stick that can be brandished when necessary, I’m afraid to say that history, including very recent and close history, shows that attention can wander and those who the financial sector should be serving can feel that it operates the other way around.
As in most aspects of life, finding the right balance between carrot and stick is easier said than done. My interactions with my 3 teenage children demonstrate that to me every day.
Encouraging providers to do the right thing and punishing them for not doing so is a matter of constant re-assessment and judgement.
Across different parts of our ever-expanding regime, the balance will be different, depending on:
- the maturity of the regulatory framework for the sector
- the risk of harm to our people and our markets
- and the attitude or performance of the relevant sector.
But let there be no doubt, the substantial increase in our funding for litigation announced by Minister Faafoi late last year reflects a significant commitment to investigating potential misconduct and applying appropriate sanctions. We will not be out-gunned.
I think our track record reflects that appetite.
In the last 12 months alone, we have filed court proceedings in relation to the collapse of CBL, we have finally completed the last finance company case by securing jail time for the key protagonist in Viaduct Capital and Mutual Finance and convictions for the others.
We have secured criminal convictions and prison sentences for Steven Robertson and Messrs Provan & South and laid charges against another individual – people who played on the edge of the regulatory playing field and who preyed on vulnerable parts of our society.
We have several AML investigations well-advanced, proceedings filed in relation to manipulative trading in Oceania Natural Limited and another sizeable market manipulation investigation underway.
We secured one criminal conviction for insider trading but failed to convince two juries to convict another individual in the same case. We did secure admissions to insider trading and payment in lieu of a penalty from individuals in two cases.
We have continued our 100% success record against companies seeking to register on the FSPR where, in some cases, there is an admitted commercial interest in demonstrating a nexus to NZ or even a degree of regulation here, notwithstanding there is none.
Lastly, it took years and court rulings all the way up to the Supreme Court but we got court approval to pass on information we had obtained from ANZ in relation to their dealings with Ross Asset Management to investors. Those investors have now filed proceedings against the bank.
We have been busy and we expect to get busier.
Working with the industry
One important aspect of the FMA’s work that I would like to highlight today is our preferred route of working closely with both providers and users of financial services.
We do this to ensure that our expectations reflect the reality of users’ needs, and that what we require of providers is achievable and fair.
I think it’s fair to say that over the last 12-18 months we have been surprised, disappointed and occasionally downright frustrated at parts of the industry. I have had occasion to be pretty blunt about that.
But I also know that within the industry there is a committed group of people who are motivated to get the right outcomes for customers.
The government has responded to concerns about an advice regime which was confusing to everyone who touched it or operated within it by bringing anyone calling themselves a financial adviser within the regulatory boundary.
Against the backdrop of the Royal Commission in Australia, the government has responded to our concerns about complacency and lack of attention to customers within retail banking and life insurance, and tabled the CoFI bill to bring those sectors into the conduct regime.
Which, by the way, is consistent with every other developed jurisdiction I can think of.
We are determined to work closely with the financial advice sector to assist people and firms to make the relevant decisions about licensing.
The very significant engagement across the adviser population led by John Botica and involving a large number of FMA staff shows our commitment to this.
I would note that both in financial advice and in other sectors, we have seen many good examples of engagement with us and I hope that our positive response to that has been evident.
For banking and insurance, bearing in mind a potentially lengthy period between now and implementation dates for the CoFI bill, we hope to engage in detailed dialogue with the industry and with consumer groups to ensure we get the new conduct regime fit for purpose.
I talked earlier about our enforcement work – that’s the stick. I want to take this opportunity however to reinforce that if we all agree on the basic expectations around the way retail financial services are delivered and the outcomes that everyone is aiming for, the regulation of that area does not need to feel revolutionary or overly prescriptive.
We want to offer the carrot.
It needs a smart and effective regulator to deliver the government’s objectives and it needs an industry that will consider major changes to business practices in order to better serve the customer.
If we all come to the table with the same end-goal in mind, the path can be clearer and more straight-forward.
An industry that is visibly taking the end-user into account in all circumstances and all situations will encourage trust and confidence in the sector, and that will encourage more people to use and to buy more of the services and products.
We’re not always going to agree on exactly how best to deliver that for customers, but as long as we can see the intent, we will do everything we can to make this a collaborative exercise.
For sustainable change within the retail financial services industry, that change must be chosen rather than imposed.
I accept the line between the two might feel narrow at times. But I am confident from my conversations with those running the banks, the insurers, the fund managers and with financial advisers, that common goals can be found.
I and the team at the FMA look forward to working closely and positively with you all.
Thank you.
