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Guide to good conduct

The Financial Markets Authority is being urged to clarify the intent of its proposed guide to good conduct to avoid confusion between what is demonstrated to customers and what is demonstrated to the FMA as market regulator.

Wednesday, December 21st 2016, 8:58AM

by Owen Poland

In a wide-ranging submission, a Joint Advocacy Group of INFINZ and the CFA Society says that while the Guidance is a "valuable tool" for market participants in framing their compliance and delivery programmes, and in engaging with the FMA, it becomes problematic where it calls for a 'demonstration' of a range of matters such as those embodied in the Good conduct in practice section.

According to the JAG submission, 'There is a risk that these are interpreted as amounting to prescription of specific outputs or processes, which would not be consistent with the stated aims of the Guidance or in many cases with the provisions and overall scheme of the FMCA.'  

The FMA has repeatedly emphasised that the guide was never intended to be a checklist or something that laid out required processes to be followed by firms. However the JAG says this is difficult to reconcile with the fact that the FMA's expectations are expressed as requiring demonstration - in the sense of evidence of compliance.

"We submit that they should be appropriately anchored in a legislative standard or rule, in order to avoid potential inconsistency and confusion and to respect choices made by lawmakers"

The JAG submission says that the concept of 'demonstrating' relevant matters "is pervasive" in the Guidance, and it is concerned "that this takes the Guidance away from its stipulated basis in principles toward being, in potential effect if not in intent, a prescription of processes or outputs."

To avoid any "confusion or over-reach" in terms of its stated aims, the JAG says that some relatively straightforward improvements could clarify its intent, as follows;

  • Stating that the Guidance does not apply to wholesale customers or market conduct (which we understand are likely to be the subject of separate guidance).
  • More clarity in the preamble to the “Good conduct in practice” section, for example distinguishing between matters expected or all licensees and matters that may be relevant depending on the particular product or circumstances.
  • Focusing on outcomes, with particular processes put forward solely as suggestions or case studies.
  • Clarifying that “demonstrate” does not mean creating self-serving red tape, but means showing awareness relevant matters have been satisfactorily addressed (or showing why they are not relevant).
  • Distinguishing between what is expected to be demonstrated to customers and what must be demonstrated to the FMA as market regulator. 

The JAG submission was one of 29 received by the FMA on its guide to good conduct, and while a number of submitters focused on the legal status of the FMA's expectations, others thought that the guide was not sufficiently detailed and needed far more concrete detail about what good and bad conduct looks like, and what it takes to comply.

The FMA will publish a final version of the guidance and a report on submissions in the new year, however Chief Executive Rob Everett says it does not create or replace any legal obligations on financial services providers. "Its intention is to prompt their leaders first to consider why good conduct matters; and then to think about how to make that happen within their own organisations."

Tags: FMA

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