The Government is halfway through a two-phase reform of New Zealand’s financial services sector. 

Following the July 2024 implementation of phase one of the Government’s reforms to financial services regulation, the Government has provided further detail on the scope of phase two. 

Phase two involves streamlining financial services regulation to ensure effectiveness and avoid duplication. As part of phase two, the Minister has announced further changes to the Conduct of Financial Institutions (CoFI) licensing regime, including changes to remove duplicative and overly prescriptive requirements. There will also be amendments to the Financial Markets Conduct Act 2013 (FMCA), Financial Markets Authority Act 2011 (FMAA), and the Financial Markets Conduct Regulations (FMCR).

Minimum requirements for CoFI fair conduct programmes

Financial institutions (FIs) will have to include how they will apply, disclose and review fees and charges and how they will record and resolve consumer complaints in their fair conduct programmes (FCPs). FIs that are also financial advice providers will already have complaints systems in place. The fee transparency reflects the “consumers receive fair value for money” pillar in the Financial Markets Authority (FMA) consultation on “outcomes-focussed” regulation. This and other similar publications on this point are a good source of guidance on the approach being taken to fees in FCPs.

Single conduct licences

Currently, financial institutions can find themselves with three regulators: the Reserve Bank of New Zealand (RBNZ), FMA and, in respect of the Credit Contracts and Consumer Finance Act (CCCFA), the Commerce Commission. Some firms need multiple FMA and / or RBNZ licences. The CoFI regime will introduce an additional licence requirement. The FMA can either issue multiple licences, or a single licence covering all services provided by the firm. Although the FMA can issue a single licence without changing the law, this approach can be complex and expensive (for example, the FMA might need individual firm consent to consolidate existing licences). Therefore, the Minister has confirmed the law will change to require the FMA to issue a single conduct licence to cover multiple market services and the RBNZ will issue one prudential licence. 

Increase to FMA powers

The FMA will have the power to conduct on-site inspections without prior notice. This power is expected to only be used in limited circumstances, where notice would defeat the purpose of the visit or where there is an urgent need for action. This power will be subject to the following safeguards in order to comply with New Zealand Bill of Rights Act 1990:

• The FMA can only exercise the power at a reasonable time and in a reasonable manner consistent with the purpose of the power
• The power does not allow for inspections of private dwellings and marae, and
• The FMA must authorise employees, or suitably qualified or trained persons, to carry out the inspections.

To avoid duplication, the FMA will also gain the power, when appropriate, to rely on work done or assessments carried out by the RBNZ when assessing matters related to FIs.

Change in control approval requirements

FMCA licensed firms will need approval from the FMA for changes in control, bridging a regulatory gap that could potentially have led to transactions which satisfied prudential criteria (if applicable) but raised serious concerns for future consumers.

Technical improvements

Disclosure and governance requirements will be amended to incorporate longstanding exemptions and other sensible but technical settings. Highlights include:

• Allowing the manager of a closed-ended scheme to waive meeting requirements for a calendar year if in the interest of the scheme
• Improving timing requirements for managed funds, including for annual confirmations and fund data filing
• Embedding restricted scheme exemptions, the overseas subsidiary balance date alignment exemption, the Takeovers Panel exemption and the Kauri bonds exemption into legislation/regulation
• Renaming the defined term “financial advice product” to reflect that the term covers advice on a wider range of products than just “financial products”
• Permitting relevant records to be kept in either New Zealand, Australia or another country approved by regulations
• Making exemptions to custodian assurance engagement obligations apply in a way that is consistent with the current section 561A provisions for exemptions from financial reporting and climate statements, and
• Amending Schedule 1, clauses 19(1) and 19(1A) to ensure consistent treatment of offers for financial products and options.

Proposals to improve financial dispute resolution

Currently, the different consumer dispute resolution schemes (Schemes) provided for by the Financial Services Providers (Registration and Dispute Resolution) Act 2008 (FSPA) operate inconsistently, both in terms of Scheme performance and efficiency in reaching customers. The Scheme review process will change to allow the Minister to set consistent terms of reference and reporting formats and to determine timing and who conducts the review. Schemes will also be reminded of their obligation to promote knowledge of their services and address knowledge barriers to consumers accessing the service. 

The Minister will also report back later on:

• Governance arrangements to ensure greater Scheme independence from industry 
• Setting consistent KPIs
• Options for “one front door” to promote ease of access (while being mindful of fiscal constraints - industry might have to fund this).

The Minister also notes there is consumer advocacy for Scheme consolidation but has chosen not to progress this now as it would be “a major step” and requires more work.  

CCCFA reforms 

Phase two of the reforms involves further amendment to the Credit Contracts and Consumer Finance Act 2003 (CCCFA) bringing what Commerce and Consumer Affairs Minister, Hon. Andrew Bayly, has described as a "significant shift in consumer credit regulation, away from the prescriptive and restricting landscape of old, and towards a more commonsense approach”. The key changes to the CCCFA proposed in phase two are: 

Single license regime

The FMA will be taking on new regulatory functions under the CCCFA with the oversight of the CCCFA being moved from the Commerce Commission to the FMA. With this change, lenders who provide consumer credit will be required to be licensed by the FMA (noting, that there will be no cost to providers in obtaining this license). 

Removal of personal liability 

The duty on directors and senior managers to undertake due diligence to ensure lenders comply with the CCCFA will be removed. The view is that these provisions have made lenders overly conservative in recent years and resulted in increased compliance costs to borrowers. The onus will remain on the institutions to maintain good lending practices and directors/senior managers will still be liable if they are knowingly or deliberately involved in a contravention. 

Disclosure obligations

The CCCFA requires lenders to disclose specific information to consumers, ensuring borrowers can make informed decisions. However, if breaches are not discovered promptly and affect a large number of borrowers, penalties can be very high. The proposal will retain liability for failing to meet disclosure obligations but require the borrower or the FMA to show harm before imposing penalties. The Minister’s view is that this will still incentivise proper disclosure but remove disproportionate penalties for failures that do not cause harm. The FMA’s additional licensing and supervision tools are expected to counteract any risk from relaxing penalty provisions. 

Next steps

The Minister is intending to return to cabinet later this year to seek additional insight on future policy decisions, as the review of the financial services sector remains firmly in the Government’s focus. The proposed phase two reforms are expected to be further refined this year with a Bill effecting the proposed reforms to be introduced in December this year.

Special thanks to Sam Chaytor-Waddy and Hamish MacDonald for their assistance in writing this article.