MR No. 2023 – 24
The Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko – today published its final guidance for financial institutions that distribute products and services through intermediaries as part of the Conduct of Financial Institutions (CoFI) regime.
CoFI will introduce a new conduct regime to ensure financial institutions (banks, insurers and non-bank deposit takers) comply with a fair conduct principle to treat consumers fairly, and establish, implement and maintain a fair conduct programme.
These programmes must account for intermediated distribution arrangements where an intermediary or agent is involved in the distribution of a financial institution’s products or services, such as insurance or mortgages, or car dealers selling vehicle finance or insurance.
The draft guidance was informed by a series of workshops held with financial institutions and intermediaries in 2022. The guidance was finalised following consultation earlier this year. The FMA received 15 submissions from a range of stakeholders during the formal consultation.
The guidance outlines the FMA’s expectations for intermediated distribution under CoFI at a high level, so it can be applied across different sectors and distribution models. The FMA does not prescribe what financial institutions must do to comply with CoFI, or set out a list of steps or rules that financial institutions must take to satisfy the legislative requirements. There is no ‘one-size-fits-all’ approach.
Clare Bolingford, FMA Executive Director for Regulatory Delivery, said: “Responses to the consultation were constructive. We expect the guidance to be well-received because it is principles-based, at a high-level and provides practical examples of how to maintain a fair conduct programme when managing customer relationships through an intermediary. This is consistent with our outcomes-focused approach to regulation, the new conduct regime, and our intention to empower financial institutions to take ownership of how they drive fair treatment of consumers in their businesses.
“This includes how they manage the risk of consumers not being treated fairly. We want firms to have the flexibility to design and implement fair conduct programmes that are fit for purpose and right-sized for their businesses and distribution models.”
The Financial Markets (Conduct of Institutions) Amendment Act 2022 introduces a new regime for the conduct of registered banks, licensed insurers and licensed non-bank deposit takers, with an overarching principle for these financial institutions to treat consumers fairly.
Once the new regime comes into force (from 31 March 2025), registered banks, licensed insurers and licensed non-bank deposit takers providing services to consumers will need to operate under a financial institution licence issued by the FMA. The FMA will begin accepting licence applications from 25 July 2023.
CoFI and the new financial advice regime
Intermediaries that provide financial advice are required to be licensed by the FMA as a financial advice provider (FAP) or operate under a FAP licence. These intermediaries are subject to their own set of conduct duties under the financial advice regime in subpart 5A of Part 6 of the FMC Act, and must comply with the Code of Professional Conduct.
Both CoFI and the financial advice regime require consumer interests to be considered in relation to the distribution of products and services. Ultimately the FMA’s considers the CoFI and financial advice regimes are complementary, with broadly consistent overarching policy objectives. The policy intention is that the dual regimes create a shared responsibility between financial institutions and FAP-licensed intermediaries for fair treatment and outcomes for consumers.
Acknowledging the complementary nature of the two regimes, CoFI requires institutions to take into account other legal obligations their intermediaries may have in determining what policies, processes, systems and controls are effective for the purposes of their FCPs. An intermediary that holds a FAP licence will generally pose a reduced level of risk that the institution’s distribution method will not meet the fair conduct principle. However, the firm should conduct its own risk assessment that takes all relevant factors into account.
The FMA and RBNZ Conduct and Culture review of banks and life insurers in 2018 and 2019, highlighted conduct risks around the use of intermediaries, with the life insurance review noting that “some insurers appeared to believe that they have no responsibility for customer outcomes that are influenced by the conduct of these intermediaries”.