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Incentive reform: Opportunities missed

Former Financial Markets Authority senior solicitor Simon Papa, now director of Cygnus Law, weighs in on changes proposed for the insurance sector.

Wednesday, May 8th 2019, 6:00AM

The proposals for further regulation released at the end of last month follow the damning report from the Australian Royal Commission (ARC) on the conduct of banks and other financial institutions and the FMA and Reserve Bank's reports last year on the conduct of New Zealand banks and insurers. 

The Government’s preferred options are a reasonably balanced response to the issues identified and do not go as far as the Australian Royal Commission recommendations. 

However, the preferred options are still ambitious and represent a significant change to how banks and insurers have been regulated to date. 

A lot of detail still has to be worked out.  

Existing conduct law not being enforced:  Like the earlier RBNZ/FMA reports, the paper dismisses, with very little analysis, the effectiveness of the existing law governing the conduct of banks and insurers.  

The paper highlights a number of examples of poor conduct that appear to constitute breaches of those existing laws. 

However, in the last five years neither the FMA nor the RBNZ have brought court proceedings, or taken any other public regulatory action, against a bank or insurer for misconduct in relation to customers. 

That may be because the existing law is inadequate. 

However, over the same period the Commerce Commission has successfully completed dozens of court and regulatory enforcement actions for breaches of equivalent law. 

Targets included large companies such as Spark, Vodafone, Noel Leeming, and Steel & Tube. 

Over that period the Commerce Commission also concluded actions against ANZ Bank and Tower Insurance in relation to conduct that largely occurred before April 1,2014, when the FMA took over responsibility for fair dealing in relation to financial products and services.  If existing laws are not being complied with or enforced are new, more extensive, laws going to be any more effective at addressing the same misconduct?

Market-based solutions not supported: The paper dismisses market-based solutions, based on a limited analysis of limited examples. 

The report, in effect, presupposes that further regulation is the appropriate response. 

As a result ways that market solutions could be supported to provide an effective response to some concerns are not considered.

The paper does not fully take into account the important function that financial advisers provide in the market including to address the imbalance of knowledge and power highlighted as a key issue.

Rather, the paper proposes imposing obligations on banks and insurers to monitor and control third-party financial advisers. 

That risks eroding the independence and effectiveness of third-party financial advisers (a risk that is acknowledged in the paper).  The paper could have considered ways of supporting consumers to better access independent advice including via roboadvice.

The paper notes that comparison websites for general insurance are not available in New Zealand because insurers won’t make the required data available.

The paper concludes that comparison websites are not an effective measure.  The insurance contract law review paper is more positive about comparison websites. 

An option that should be considered is regulatory support for comparison websites, in particular a requirement for insurers to release data to support such websites. 

Regulations that require KiwiSaver schemes to disclose fees and costs in a consistent way have been very effective- such disclosure helps to identify issues and supports consumers to make better decisions.

In addition, the FMA has a power to regulate KiwiSaver scheme fees via the obligation in law that fees must not be unreasonable.  In practice that power appears to have had little, if any, impact generally. 

Simplicity KiwiSaver (a not-for-profit provider) has entered the market offering significantly lower fees than incumbents.  This highlights that greater regulator powers, including in relation to fees, do not guarantee outcomes better than the market can achieve.

Cross-selling controls not considered: A key recommendation in the Australian Royal Commission report was a ban on cross-selling during a meeting or call with a person for another purpose. 

In New Zealand, banks have been criticised for cross-selling, including of KiwiSaver schemes. However, cross-selling issues and potential responses are not addressed at all in the paper. 

While it was always unlikely that a similar ban would be implemented in New Zealand, the Australian Royal Commission's concerns about cross-selling, and the issues in New Zealand, mean that cross-selling issues should have at least been considered.

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