6 minute read
REGULATION
Advisers dance the regulation tango
As new pieces of legislation jostle up against each other, advisers may find the banks peering over their shoulders.
BY ERIC FRYKBERG
Advisers watching one law in partial retreat are seeing another one steadily advance.
The retreating law is the Credit Contracts and Consumer Finance Act (CCCFA), which has had two extreme elements removed and awaits further reform.
The advancing law is the Financial Markets (Conduct of Institutions) Amendment Bill (COFI), which passed its third reading in Parliament in June, three years after it was introduced.
This law requires banks, insurers and non-bank deposit takers to be licensed by the Financial Markets Authority (FMA) in relation to their general conduct.
The extent that this affects advisers is unclear. Initially, the COFI law would have treated advisers as though they were virtual employees, not intermediaries, of financial institutions.
This would have blurred the distinction between employees and contractors, and could have expensively replicated the Financial Services Legislation Amendment Act (FSLAA) which set up the FAP licensing programme.
The dangers of an obvious legislative double-up were averted when part of the COFI bill was dropped, following an outcry, and a softer version emerged to make the final reading in parliament.
But in the end, FSLAA and COFI experienced a separation rather than a divorce, leaving financial institutions still with some responsibility for intermediaries. The unanswered question is: how much?
Banks looking over your shoulder
The answer seems to be that advisers will not have to take much direct control, but they will still have to put up with a lot of indirect control. In the words of one insider, financial institutions such as banks will be “looking over the shoulder” of intermediaries such as advisers.
There is already a mass of ethical control on advisers, from the FAP regime, to the CCCFA, to advisers' own ethical and professional principles.
But the banks want more. Since they must comply with COFI, they want to make sure people who advance their products for them do the same. Just how to achieve that is the problem.
“As usual, the devil will be in the detail,” says the chief executive of the Bankers Association, Roger Beaumont.
The association stands by its view that there was no evidence of systemic abuse in the banking industry before the law was even considered. But it accepts the reality that the COFI law is now on the statute books, and that regulations will be developed to put it into effect.
“We look forward to working with the FMA and the Ministry of Business Innovation and Employment (MBIE) on the new regulations and processes,” says Beaumont.
“Banks take compliance with regulatory obligations very seriously, and will want to help make the new requirements as workable as possible.
“Getting it right is in the best interests of everyone involved, as we’ve seen recently with the new consumer-lending rules.”
Time to get the details right
There is plenty of time to get this right. Even though the COFI law dates back to 2019, applications for a good-conduct licence will not open until next year - and the whole scheme will not be in operation until 2025.
But the chief executive of Financial Advice New Zealand, Katrina Shanks, says talks to sort out the details with other stakeholders and state agencies have already begun.
“We have got one meeting a week for the next so many weeks.”
Shanks says there’s a strong sense of relief that the worst of COFI has been
averted for advisers. The job now is to make the amended-but-still-forceful law work as well as possible for everyone.
“I think it is a matter of working with the product providers, through the FMA guidance workshops, to understand the roles and responsibilities under the new regime,” Shanks says.
“Areas that get talked about all the time are areas like, ‘Who should be communicating with the client - the product provider or the adviser?’
“These things aren't black and white in the world we live in.”
Fraught relationship dynamics
Shanks is also having to deal with the relationship between FSLAA and COFI, who might be separated but still live in close proximity.
Further insight into managing this fraught relationship was provided to the Financial Services Council (FSC) by the FMA's director of banking and insurance, Clare Bolingford.
While praising the economic importance of intermediaries like advisers, she called attention to deficiencies in the way the system worked.
In a speech, she said the “market dynamic” did not always “facilitate fair treatment.”
There had to be a “shared responsibility” by both groups to ensure customers were treated fairly.
However, that should not compromise the independence of the two parties involved: advisers and providers.
Bolingford, who made clear she is a big fan of COFI, admitted there was a great need for clarity on what the law would require.
She “absolutely” wanted to avoid “unintended and unnecessary consequences, especially if they add cost and burden to the industry without obvious benefit to the customer”.
Discussion across the industry would be undertaken to avoid that. Shanks is also having to deal with the relationship between FSLAA and COFI, who might be separated but still live in close proximity.
Further insight into managing this fraught relationship was provided to the Financial Services Council (FSC) by the FMA's director of banking and insurance, Clare Bolingford.
While praising the economic importance of intermediaries like advisers, she called attention to deficiencies in the way the system worked.
In a speech, she said the “market dynamic” did not always “facilitate fair treatment.”
There had to be a “shared responsibility” by both groups to ensure customers were treated fairly.
However, that should not compromise the independence of the two parties involved: advisers and providers.
Bolingford, who made clear she is a big fan of COFI, admitted there was a great need for clarity on what the law would require.
She “absolutely” wanted to avoid “unintended and unnecessary consequences, especially if they add cost and burden to the industry without obvious benefit to the customer”.
Discussion across the industry would be undertaken to avoid that.
Bouquets and brickbats
When the COFI law was passed, it was praised by its driving minister, David Clark.
The new legislation would make sure that financial institutions put customers before profits, said Clark, who is the Minister of Commerce and Consumer Affairs.
“This work comes at an important time, as the Government supports Kiwis through the current cost-of-living crisis,” he said.
“It will help to ensure they’re not unknowingly paying for services they do not need, or taking on debt they cannot afford.”
But the National Party declared COFI a solution looking for a problem. There had been no systemic conduct which needed fixing, MPs said, and isolated cases of it were easily able to be dealt with by existing law on fraud.
Nevertheless, the law passed with support from Labour, the Greens and Te Pati Maori.
The FMA is meanwhile getting on with the job of sorting out a law it likes and wants to make work.
FMA chief executive Samantha Barrass points to what she says are positive aspects of the law.
“The new conduct regime is outcomesfocused, with requirements that are intended to be flexible and nonprescriptive.
“It is not a rules-based regime that prescribes how outcomes must be achieved,” she says.
“The intention is that this law will drive positive industry behaviour-change, to ensure the fair treatment of consumers.”
Barrass argues the law is flexible and workable.
“The new law applies to a range of financial institutions and needs to be workable across a diverse range of business models,” she says.
“The FMA expects firms to avoid a tickbox compliance approach and to adopt good practice to achieve good conduct risk-management and fair consumer treatment and outcomes.” ✚
Samantha Barrass
