Regulation

The next piece of the puzzle

Matthew Martin takes a closer look at the ‘CoFI’ Bill – the latest in a series of moves to overhaul the financial services sector.

It's probably the last thing mortgage advisers and lenders want to think about right now, but by mid-2022 it will probably become a reality. The Financial Markets (Conduct of Institutions) Amendment Bill, known as CoFI, will be back for its second reading in the first few months of the year, adding – if passed - to the ever-increasing list of regulations covering the sector.

Advisers and industry experts say they understand the basis of the bill, but are not so pleased with the additional costs it will impose on practitioners. But, they say, it's a bridge they will cross when they come to it.

First, however, a bit of background on CoFI and what it means for the institutions and advisers will oversee.

Regulating conduct of financial institutions

Introduced by Government in December 2019, the legislation intends to regulate the conduct of financial institutions.

CoFI will require banks, insurers, non-bank deposit takers and lenders to be licensed in respect of their general conduct towards consumers. It means that financial institutions will need to establish, implement and maintain effective, fair-conduct programmes throughout their businesses, to ensure they treat consumers fairly.

It will also require financial institutions and intermediaries involved in the chain of distribution to comply with regulations which regulate incentives.

These regulations will be able to prohibit sales incentives based on volume or value targets – for example,

soft commissions such as overseas trips, bonuses for selling a certain number of financial products, or leader boards.

If passed, the bill will see businesses needing to apply for another licence from the Financial Markets Authority (FMA), and to set out what is required for the conduct of intermediaries.

From April to June 2021, the Ministry of Business, Innovation and Employment (MBIE) consulted on two discussion documents relating to CoFI.

The bill was discussed briefly in Parliament in June, with National Party list MP Nicola Willis (now deputy leader) immediately criticising it as "...a compliance heavy, box-ticking exercise".

Willis said her party opposed the bill, but acknowledged the fact that "... financial institutions, banks, insurers and the like should have controls in place to ensure they are focused on the best interests of their customers".

Multiple concerns

MBIE said in a statement that stakeholders had raised several concerns, including the proposed requirements for financial institutions to oversee and train any intermediaries distributing or managing their products to ensure good outcomes for consumers.

"They have also raised concerns about the overlap with the obligations that apply to some intermediaries under the new financial advice regime – the Financial Services Legislation Amendment Act (FSLAA).

"Stakeholders' concerns have centred around the breadth and scope of the definitions and obligations, and the potential cost and burden of compliance."

MBIE sought feedback on options for amending the bill to address the concerns, particularly concerning the definition of an intermediary, the obligations for intermediaries, and the obligations for employees and agents. "Feedback on these proposals will inform officials' advice to the Minister of Commerce and Consumer Affairs to enable policy decisions."

The FMA says it, like everyone else, is waiting on the outcome of those amendments and the completion of the second reading.

"The Government will need to decide whether amendments should be made to the Bill (via Supplementary Order Paper) and whether regulations are necessary to support the new regime, taking into account the feedback received from the consultation,” the agency said in a statement.

"The FMA will continue to engage with industry before and after the policy decisions are confirmed by Government to ensure that the expectations on financial institutions are clear."

Necessity questioned

Mortgage adviser Cameron Marcroft, from Loan Market Central, says he questions whether CoFI is necessary right now. He hopes it won't appear on the scene before the issues with the Credit Contracts and Consumer Finance Act (CCCFA) are sorted out.

"I'm hoping CoFI doesn't impact our customers and clients like the CCCFA has.

"Compliance costs are always an issue and we will look at this when we need to. We can't control that at the moment."

Marcroft says everyone will need more clarification when it comes to how CoFI will affect intermediaries.

"I don't think we have an issue with the soft dollar in New Zealand like they do in Australia, so are we going to achieve anything with this in the end?"

Aurora Financial chief executive Simon Rolland hopes the Government has been listening to the industry's concerns about the proposed legislation.

"I know there's a lot more scrutiny from providers, which is welcome because they need to know that what we are doing is correct.

"But if it's going to create more barriers to financial advice, we really don't want to make it any more costly.

"We are pro the industry getting better and pro having better advisers - but if the barriers are so high, it will continue to put people off."

Rolland says CoFI will inevitably add more costs to the business, especially in terms of compliance, on top of all of the other regulation issues the industry is facing.

"It would be nice for things to quiet down for a few years. But it’s another bridge we will need to cross when we get to it. We'll hope to turn it into a positive, as we have done with other pieces of legislation.”

Puzzle piece about to be put down

Financial Services Council chief executive Richard Klipin says CoFI is the next piece of the puzzle in the Government's overarching conduct regime.

"It's important for it to land well and land correctly.

"It's also part of the emerging trend that financial advice is good for New Zealanders, and that all those regulations need to ensure that professional standards lift for consumers in terms of access to good advice."

Klipin says the implementation of CoFI will be critical and he commends the Government for taking its time to get it right.

"The conduct requirements on the large institutions are significant and important, and we look forward to the revised piece [of legislation] landing.

"The Government and MBIE have been at pains to work closely with us, and with the sector as a whole."

Clear definitions required

Lawyer Tim Williams, a partner at Chapman Tripp, says while a lot of detail is yet to be revealed, especially on how CoFI will affect intermediaries, he expects linear commissions will still be acceptable. He would like to see more guidance on the definition of the term "fairness".

He says due regard has been given to the “interests of the consumer”, but describes this as a very open-ended definition.

“Leaving it to the courts to determine would be a very poor outcome.

"Fairness should take account of both sides’ interests - but there is no recognition balancing the needs of providers."

The FMA's director of banking and insurance, Clare Bolingford, says the regulator wants to work with the industry, and that it is preparing a dedicated team to support the implementation of CoFI.

She says the FMA learned a lot from FSLAA, and will try not to double up on information already collected for the financial advice licencing process.

The FMA will use a tailored approach, depending on the type of entity it is dealing with, its size, and the risk posed to consumers.

"This is not just saying the customer is always right, but there is a balance, and all sorts of considerations are taken into account. We will share good-practice examples when we see them." ✚