Fair conduct programmes (FCPs)

Option 

Our comments

Remove/amend some minimum requirements for FCPs (preferred), to reduce prescription and duplication and to provide greater flexibility, while not reducing the expected fair conduct standard itself. 

The amendments could include:

• Removing minimum requirements for FCPs to have policies, processes, systems and controls for (a) enabling the financial institution to meet its legal obligations to consumers; (b) identifying, monitoring, and managing conduct risks; and (c) ensuring there are methods for reviewing and identifying deficiencies in the FCP; and
• Adjusting or consolidating minimum requirements relating to employees and agents on following procedures and processes, and training and supervision of employees.

This option seems sensible and could make compliance and oversight more streamlined.

The consultation document notes the risk that removing specificity could make it harder for financial institutions to understand what their FCP should look like, but believes this could be addressed through regulations or FMA guidance. 

However, moving the material to regulations or FMA guidance would (in our view) seem to make this proposal potentially redundant, and would only lead to more confusion along with the risk that FMA guidance may be viewed as mandatory.

Add new minimum requirements relating to disclosure and review of fees and recording and resolving complaints.

This option could be implemented together with the preferred option above (removing/adjusting the minimum requirements) or the status quo option below (retain minimum requirements). 

This option is aimed at addressing issues identified in the FMA and RBNZ conduct and culture reviews, but not made explicit in the existing list of minimum requirements for FCPs. Further, the Minister of Commerce & Consumer Affairs has indicated a focus on fee transparency and adequate complaints processes. 

Fee transparency in the financial services sector (including in relation to intermediaries) is something that the FMA has already tried to address over a number of years by influence, through reports^[1] and guidance^[2].

It is hard to argue that fees and complaints processes should not be covered in any FCP. As the consultation document notes, these aspects are in fact arguably covered already. However, improving clarity could avoid unproductive arguments during licensing or monitoring.

Remove all minimum requirements for FCPs and simply have a requirement for a programme (including policies, processes, systems and controls) designed to ensure compliance with the fair conduct principle (not preferred).

This would maximise flexibility for financial institutions, but would decrease clarity and increase uncertainty.

Removing minimum requirements for institutions is likely to be unhelpful, as it makes it harder to know when the standard is met. Experience also shows that not all institutions will devote appropriate resources to creating and maintaining FCPs, leading to unfair advantages between institutions that prioritise fair conduct and those that don’t. Removing minimums would also significantly increase the FMA’s regulatory burden in supervising the FCP regime. 

Retain status quo with minimum FCP requirements (not preferred).

Maintaining the status quo will perpetuate the inflexibility of the current regime, but helps financial institutions understand the FMA’s desired approach.

Amending fair conduct principle

Options

Our comments

Retain status quo (preferred option) - ie retain the broadly constructed fair conduct principle, with an open-ended inclusive list of what fair treatment of consumers looks like.

The consultation document identifies that the broadly constructed fair conduct principle provides flexibility for financial institutions to support fair outcomes for consumers and allows for the concept of fair treatment to evolve over time, but it could also cause uncertainty and concern about liability, and make financial institutions unnecessarily risk averse and reluctant to innovate. There is also concern about the potential for the FMA to fill an empty space with guidance, that may then be viewed as mandatory.

The consultation document notes that there has not been a lot of industry feedback on this issue to date. This is an opportunity for institutions to make explicit these types of concerns.

Make the definition of the fair conduct principle exhaustive (not preferred). 

The current open-ended inclusive list of matters that fair treatment of consumers includes would become an exhaustive list and the concept would not be able to evolve over time.

While this could provide some certainty as to what constitutes fair treatment of consumers, it could also unduly restrict the application of the principle and the ability to cater to evolving concepts/ideas of fair treatment (and accordingly may not promote the fair treatment of consumers over time).

Consolidating financial market conduct licences

Option

Our comments

Require FMA to issue a single licence covering different classes of market services (indicated as preferred).

For example, an entity that is approved by the FMA to the services of acting as a manager of a registered scheme and acting as a provider of a financial advice service would have those two market services on its conduct licence. If in future the entity applied and was approved to provide an additional market service, this would be added to the same licence. 

Current conditions that apply to each licensed service would continue to apply to each service. The FMA’s powers to vary, suspend or cancel licences would continue to apply, with the ability to exercise these in relation to particular market services.

This option is to address siloed licensing that may impose unnecessary costs and complexity for providers who currently have to hold multiple separate licences. This would apply to market services licences only (ie supervisor licences are excluded). Note also separate consultation on whether “acting as a creditor under a consumer credit contract” should be added as a market services licence.

This option seems like a sensible idea, to reduce overlap and make compliance and oversight more streamlined. The consultation document also indicates that the FMA would separately be considering streamlining licence standard conditions for the different market services, and better harmonising how the FMA collects data from regulated entities across all of their licensed market services.

Enabling reliance on another regulator’s assessment

Options

Our comments

Enable the FMA and RBNZ to rely on an assessment by the other where appropriate (indicated as preferred).

This would occur for fit and proper assessments and might also apply to licensing conditions such as outsourcing, business continuity and technology systems.

This is intended to better enable the FMA and RBNZ to work together and to reduce regulatory burden for financial markets participants (eg potential duplication between licensing and ongoing monitoring/supervision requirements for entities that are dual-regulated by the FMA (conduct) and RBNZ (prudential)).

This seems like another sensible idea, to reduce overlap and streamline compliance and oversight.

Ensuring the FMA has effective tools to monitor compliance

Options

Our comments

Introduce change in control approval requirements for market services licensees, similar to those which apply to entities prudentially regulated by RBNZ.

The requirement to obtain approval would apply to the proposed new controlling owner (purchaser).

For dual-regulated firms, it is proposed that the FMA would coordinate with RBNZ in conducting any assessment and may be able to rely on a joint request for information or rely on RBNZ assessments.

The expectation is that the FMA would assess the new owner against the licensing criteria in the FMC Act, including whether the change in control would affect the licensed firm’s capability to effectively perform the licensed services.

This option could apply only to licensed financial institutions (CoFi regime) or to all entities licensed by the FMA to provide a market service.

FMC Act licensed entities are not currently required to obtain a regulatory approval from the FMA ahead of any change in control taking place. The FMA can take reactive action if issues arise after the change of ownership.

This would add additional work/time (and costs) in an acquisition process, but at the same time, would provide the purchaser with more certainty that the FMA will not investigate their standards after acquisition, simply for the change in control. It is consistent with the consumer protection aim of the regime, and purchasers would usually already well understand that they need to be able to maintain standards in order to maintain the licence of an acquired provider.

Introduce on-site inspection (without consent or notice) powers for the FMA, for the purpose of carrying out market conduct supervision of firms. This is intended to better enable the FMA to proactively monitor compliance.

Appropriate safeguards would be put in place, such as:

• only being able to exercise the power at a reasonable time and in a reasonable manner consistent with the purpose of the power;
• exclusions for inspections of private dwellings and marae;
• the authorisation or approval of persons carrying out inspections (and those persons being well-trained and having requisite expertise); and
• confidentiality protections for information gained from inspection.

The FMA does not currently have such powers in relation to market services licence holders (other than for AML/CFT Act purposes). The FMA can currently carry out on-site inspections of regulated entities with consent, require specified information by written notice, or use search powers under a court-ordered warrant.

An on-site inspection (without consent or notice) is not something institutions particularly welcome, but is a generally accepted regulatory tool that assists in holding providers to account. The consultation document notes the vast majority of inspections would still be carried out with notice and consent, and that appropriate safeguards would be put in place.

The consultation document invites views on what safeguards might be appropriate. 

Powers for FMA to require regulated entities to provide a report completed by an expert approved by the FMA. This power could require:

• the report to cover any matter relating to the business, operation or management of the entity;
• the entity to supply information relevant to the report;
• the report to be published;
• the report to be audited; and
• the cost of the report to be borne by the entity.

This option could apply only to entities licensed to provide a market service, or to all entities regulated as financial markets participants (whether required to be licensed or not).

The FMA cannot currently require a report completed by a suitably qualified person or entity, but this would be useful as a diagnostic and monitoring tool used to inform further action by the regulated firm or by the FMA.

Option

Our comments

Retain existing scheme model and monitor the impact of new regulations due to come into force on 18 July 2024 to align the schemes’ rules to compensation limits and complaints timeframes, before considering other changes. 

No work would be undertaken by the government to improve consumer awareness of schemes or increase oversight of schemes’ performance.

The changes introduced by the regulations in themselves seem unlikely to address the consumer awareness and confidence problems identified.

Provide greater support for consumer access and awareness, such as:

• More services that provide information, advice or navigation support to consumers (or those who support them such as financial mentors);
• Strengthen existing requirements to make dispute resolution information available (eg extend the requirement to make certain information about their complaints processes and availability of dispute resolution scheme to all financial service providers);
• Require dispute resolution information clear and prominent in all communications, and on the provider’s website; and
• Awareness campaigns.

These all seem to be sensible ways to support consumers.  

Improving access through a “single front door” - eg providing for a single 0800 number or website for consumers to access the dispute resolution schemes.

Existing schemes already work together to refer complaints on to the correct provider, but this option looks at making further improvements.

Again, this seems like a sensible idea.

Improved oversight of schemes and accountability measures, such as:

• Improving the consistency of independent reviews (eg the government setting consistent terms of reference of independent reviews of schemes);
• Government setting scheme rules;
• Independent governance of schemes (eg the government appointing scheme board members or setting qualification criteria for board member appointments); and
• Evaluating schemes’ performance against targets or standards (eg requiring schemes to report on key metrics, such as resolution rate and consumer satisfaction, in their annual reports, or to evaluate their performance against best practice standards).

Although it is desirable to improve oversight of schemes and accountability measures, there is the possibility of considerably increasing the regulatory and administrative burden on scheme providers.