As the Financial Markets (Conduct of Institutions) Amendment Bill gets back to the House for its second reading, we are pleased to note that most of our recommended changes have been implemented. However, there remain outstanding issues to discuss, such as financial institution training and supervision for advisers.
The recent consultations have been a ‘litmus test’, and, as far as we can see, the industry’s feedback has been heard and noted. In our submission, we renewed our support of the spirit of the proposal, but we also stressed that, without fixing significant drafting issues, the legislation ran the risk of defeating its own purpose – delivering good outcomes for New Zealanders.
Here’s an overview of where the Bill (referred to as CoFI in the following) is at right now, and what else could be done to improve it from our standpoint.
Power to regulate sales incentives
We had been concerned that the draft Bill gave the regulator significant power to regulate advisers’ remuneration through licensing conditions - even though there has been no evidence of systemic failure in the current model. In fact, the commissions model has been deemed a viable system of remuneration.
While we would still like to see this provision removed, we acknowledge that the amended bill has been strengthened to ensure that there are safeguards around this. We hope these measures will be enough to avoid a negative impact on product distribution and advisers’ independence, which would be contrary to the intent of delivering choice and good outcomes to consumers.
More detailed definition of ‘fair’
The Bill introduces a new ‘fair conduct principle’, stating that financial institutions and their intermediaries must treat customers ‘fairly’. While the previous version of the Bill lacked a clear definition of ‘fair’, this has now been given more detail.
Again, this welcome change is in the best interest of the public, who can now more easily identify when the ‘fairness’ principle has been breached.
Financial advisers removed from the duties of the Bill
Financial advisers have now been removed from the duties of the Bill, as it has been clarified that they don’t have to abide by the Fair Conduct Programme.
This was also our recommendation. The overlap between CoFI and the new financial advice regime (under FSLAA) would have led to significant operational challenges. Financial advisers who work with multiple providers would have had to abide by numerous fair conduct programmes, driving up compliance costs to unsustainable levels. This could have forced many advisers to limit the range of providers they advise on – with negative effects for consumers.
Having said that, we will be seeking further consideration on section s446M of the Bill, which states that financial institutions must consider training and supervision for financial advisers.
Claims process removed from the Bill
Lastly, the claims process has been explicitly removed from the amendment bill, which is also something we recommended in our submission.
In our opinion, the previous version of CoFI failed to acknowledge the importance of an adviser’s independence from the provider during the claims process. If anything, claim time is when an insurance adviser needs to be most independent from the insurer. It is pleasing to see that this has now been recognised. In saying this we know in most instances the adviser and provider work together to obtain the best outcome for the client.
So, where to from here?
We believe it’s important that the commencement of the Bill has been extended for another year. With so many changes taking place in the financial advice world, the CoFI legislation was likely to overwhelm the sector even further.
However, one year may not be enough. A two-year ‘breathing space’ between the start of the licensed regime under the FSLA Act (15 March 2021) and the implementation date of CoFI would: a) give adviser businesses enough time to absorb the new regime, and b) help the regulator understand the real-life impact of the FSLA Act and make informed adjustments across the board.
As we said, there’s room to debate outstanding issues in the House, and with the appropriate changes, this important piece of legislation can have a positive impact for the public and for the industry alike.