Conduct and culture: changes on the horizon for Financial Service Providers

The Financial Service Providers industry in New Zealand is about to be shaken up and financial institutions including banks, insurers and non-bank deposit takers need to be ready for the imminent changes. Financial institutions in New Zealand and Australia have recently been put into the spotlight by various high profile reviews examining their business conduct. The reviews include:

• The Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry;

• The Financial Market Authority (FMA) and Reserve Bank of New Zealand (RBNZ) review of banks and life insurers; and

• The Ministry of Business, Innovation and Employment paper looking at insurance contract law and the conduct of insurers.

These reviews identified extensive weaknesses in the conduct and culture of financial institutions in both New Zealand and Australia, particularly in respect of internal governance, management of conduct risks and focus on outcomes for customers. The reviews also highlighted gaps in the New Zealand regulatory settings in that there is currently no explicit legislative mandate for the regulation of general conduct of financial institutions.

As a result of the above, the Minister of Finance and Minister of Commerce and Consumer Affairs announced the government’s intention to address the findings of the FMA and RBNZ reviews by proposing to enact a new regime to regulate financial institutions including banks, insurers and non-bank deposit takers with respect to their general conduct.

Financial institutions can expect to see the following in the new legislation:

• A new licensing regime for banks, insurers and non-bank deposit takers (including credit unions) regarding their general conduct to be licensed by the FMA;

• A requirement for licensed institutions to meet a fair treatment standard;

• A requirement for licensed institutions to implement effective policies, processes, systems and controls to meet the fair treatment standard;

• An outline of what obligations financial institutions have in relation to remuneration and any other sales incentives;

• A prohibition of sales incentives based on volume or value targets (including soft commissions e.g. overseas trips, bonuses for selling certain number of products and performance management based on volume of sales); and

• Provisions making licensed entities accountable for sales to consumers by contracted intermediaries who are not financial advice providers (e.g. car dealers and retailers selling add-on finance and insurance, and travel agents and airlines selling travel insurance).

The Cabinet Paper detailed that “fair treatment” means, among other interpretations, that:

• Customers must receive clear, fair and not misleading information and are kept appropriately informed at every point they interact with the institution, including during any claim or complaint process;

• Institutions design and sell products and services that meet the customers’ needs;

• Customers do not face unreasonable pressure to retain or change products, switch provider, submit a claim, make a complaint, or make other product or service decisions or changes – but neither are they unreasonably prevented from doing so if they wish to;

• Customers are provided with products and associated services of an acceptable standard and which perform or operate as institutions have led them to expect; and

• Institutions establish, implement and maintain effective and transparent complaint handling systems and customers are treated fairly in interactions with such systems.

The Ministers are currently in the process of drafting the legislation which will implement the new regime. The intention is to introduce this legislation to Parliament by the end of 2019. We can only speculate what the actual bill will look like. However, our recommendation is that any financial institutions that may be affected by the new legislation start planning for changes that will almost certainly be enacted shortly.

Any questions or concerns can be addressed to us in the meantime, and we will be happy to provide assistance and advice with regards to the proposed regime.

Business Law team

Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace,  Peter Orpin, Ellen Sewell, Matt Tolan, Carlo Wan, Kristina Sutherland, Jacob Nutt, Whitney Moore, Alex Stone, Ben Cooper