FMA faced conduct criticism

The Financial Markets Authority was told its early draft of a conduct guide for market participants was both too prescriptive, and not prescriptive enough.

Tuesday, February 7th 2017, 6:00AM

The FMA released its guide last week, along with the responses it received to an earlier consultation document.

There were a number of clear themes among the submissions received: Whether the guide introduced new obligations to market participants, the fact that a bad outcome did not necessarily mean bad conduct, the guide being too prescriptive - or not enough, and questions over conduct obligations for wholesale investors compared to those classified as retail.

The FMA said the guide did not create or even supplement existing obligations for providers. Instead, it said it signalled how the FMA would use conduct as a lens to look at how providers were meeting existing obligations.

The FMA said it was not designed as a checklist or manual but was expected to prompt regulated businesses and individuals to examine their approach to good conduct and to ensure they consistently delivered good outcomes to customers.

But AMP said in its submission that it would be more helpful to have real examples of situations that were market-leading in their processes and systems. It said a conduct "scorecard" would help. "It risks the guide being taken seriously mainly by willing compliers and potentially ignored by those who the FMA is likely most interested in effecting behavioural change."

It said, without a more tangible toolkit to gauge requirements, it might only be the willing compliers who took any notice. AMP also asked how the FMA could enforce action against behaviour that had been identified as poor conduct, but which was not technically illegal.

ANZ also said it would like a clearer example of what the principles of good conduct would be.

But CFA and INFINZ, in a joint submission, said the guide as it was first drafted was too prescriptive. "To the extent the FMA wishes to include particular matters in the guidance that go beyond principles and desired outcomes, we submit that they should be appropriately anchored in a legislative standard or rule."

First NZ Capital and Chapman Tripp agreed it was too prescriptive.

The guide includes questions such as: How do you know your products and services can meet, and are meeting, your customers' needs? How do you demonstrate that the way leaders and staff are paid supports focus on good customer outcomes? Are your customers paying a reasonable price?

Chapman Tripp said the questions proposed in the guide to help businesses consider their conduct would be interpreted by many as a checklist, which could be inconsistent with the Financial Market Conduct Act principles of avoiding increasing compliance costs and promoting innovation and flexibility in financial markets.

Milford Asset Management said the guidance seemed to encourage all customers to have had advice from an AFA. it said many customers did not want that, but it was not clear how a provider could have in-depth knowledge of their customers' needs, as suggested by the guide, without it.

The FSC was one of the more strongly opposed, urging the FMA to redraft the guidance.

In a statement after the release of the final version of the guide, chief executive Richard Klipin said the FSC supported the idea that good conduct was good business.

"But the regulator must always identify what is an obligation and what is an aspiration."

He said the new guide had better clarity on what it meant to provide good customer outcomes.

Many submitters questioned the idea of "good outcomes" for financial services customers. ASB said it was problematic because some customers wanted outcomes that were not economically viable. The FSC said good outcomes in financial services were often not definable in the short term.

Both ASB and BNZ said it was not reasonable to expect a provider to have an in-depth understanding of all the products available in the market.

The final version of the guide asks how providers encourage customers to understand the pros and cons of products relative to similar products elsewhere.

The earlier draft had asked how providers knew their customers would have the same or better outcome as they would have with services offered elsewhere.

The FMA said it would provide examples within its annual Conduct Outcomes Review of good and poor customer outcomes as a result of providers' conduct.

Tags: conduct FMA