FOUR FAST FACTS
ON: THE FINANCIAL CONDUCT REGIME (CoFI) OCTOBER 2023
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Background
Application and licensing
A review by the Financial Markets Association (FMA) and the Reserve Bank into the conduct and culture of banks and life insurers in New Zealand identified limitations in the governance and management of conduct risks in the banking and life insurance industries, which led to the introduction of the Financial Markets (Conduct of Institutions) Amendment Act 2022 (CoFI).
CoFI applies to any registered bank, licensed insurer, or licensed non-bank deposit taker that acts as an insurer, creditor under a consumer credit contract, or anyone in the business of providing one or more other ‘relevant services’ to retail clients.
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From 31 March 2025, these entities will need to hold a financial institution licence and have a fair conduct programme in place to continue operating.
CoFI amends the Financial Markets Conduct Act 2013 by introducing a new regulatory regime built around a ‘fair conduct principle’ which must be applied when providing services to consumers.
Incentives and enforcement
Fair conduct principle and programme
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The fair conduct principle is that financial institutions must treat consumers fairly. That requires paying due regard to consumers’ interests, acting ethically, transparently, and in good faith, assisting consumers to make informed decisions, ensuring the ‘relevant services’ and ‘associated products’ provided are likely to meet consumers’ requirements and objectives, and not subjecting consumers to unfair pressure or tactics, or undue influence. Financial institutions are required to establish, maintain and implement an effective ‘fair conduct programme’, which is a set of documented policies, systems and controls designed to ensure customers are treated fairly in line with the principle.
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Financial institutions are also required to comply with regulations relating to the provision of incentives. The regulations prohibit incentives that are determined or calculated by direct reference to volume or value-based targets. The regulations also apply to intermediaries who are compensated in connection with the provision of regulated services and associated products. The FMA will be empowered to take enforcement action in response to breaches of the legislation. This could include the imposition of fines, orders for compensation or the suspension or cancellation of the licence of a financial institution that has breached the CoFI regime.
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