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Legislation overload 'could have unintended consequences'

New rules of conduct for banks and insurers could be bad news for organisations already grappling with the looming implementation of the Financial Services Legislation Amendment Act, one law firm says.

Tuesday, October 15th 2019, 6:00AM

Transitional licensing opens next month under FSLAA.

At the same time, Conduct of Financial Institutions (CoFI) legislation is set to be introduced to Parliament in less than three months’ time, introducing new conduct obligations for banks, non-bank deposit takers and insurers.

Kensington Swan said the timing was “curious” and the new rules could add to the regulatory burden for a sector already “straining under the load of multiple regulatory reforms, reviews and investigations”, with the potential for unintended consequences.

“The financial sector has been investing significant resources in coming to grips with the regulatory burden and complexity that is being generated through the FSLAA reforms. That regime has been in development since 2016, with multiple exposure drafts and consultations to ensure the new regime has most of its kinks ironed out before implementation.”

The law firm said, with the CoFI legislation expected in the coming months, the measured approach to legislative development seen with FSLAA would not be possible.

“Some of the rushed decisions made look set to cut across – or at least complicate – plans financial institutions have been developing for managing intermediary conduct risk. This is unhelpful at this late stage.

“You also have to question the prioritisation of MBIE's resources towards this latest reform. FSLAA received the Royal Assent in April. Since that time, financial advice providers have been crying out for draft disclosure regulations, so they can put some meat on the bones of their preparation for a new financial advice regime that is now less than nine months away. The delay in getting those regulations progressed is starting to create significant challenges for the development of innovative tech-based solutions to support the new regime.”

The lawyers said that, in the political rush to be seen to have done something about an identified regulatory gap, eyes seemed to have been taken off "the current regulatory reform ball in play".

"This observation is not a criticism of the MBIE team charged with making the regulation happen. The amount of work that team has been managing in recent times is nothing short of remarkable. Rather, with limited resources at his disposal, there is a cost to the minister appearing to have diverted some of that resource to the development of new reforms, when an existing reform is in its final critical stages of development before going live."

The CoFI reforms will ban any incentives based on the volume of sales produced. There will also be a general obligation for banks, insurers and non-bank deposit takers to consider the risks and harms their remuneration and incentives can create and to design them in a way that is consistent with the fair treatment standard.

Kensington Swan said Commerce Minister Kris Faafoi had stressed the intention was not to ban commission.

"Easy to say, harder to translate into practical regulation that effectively manages the distinction."

While providers will not be responsible for advice given by FAP advisers, they will have a general obligation to ensure that customer needs are met.

"What the above distinction is likely to reinforce is a business practice that is already starting to play out, with a number of banks and insurers making the business call to say they will only deal with licensed financial advice providers once the new FSLAA regime comes into effect. This will not be a practice that is feasible for all, but it will challenge the viability of some business models, especially those involving non-adviser intermediaries where finance and insurance is sold as an incidental part of the main business activity.

"What it all means is that banks, insurers, and NBDTs may no longer view information-only distribution channels as safe harbours, relatively free from regulatory risk. If nothing else, this renders the licensed financial advice provider model more attractive as an intermediary proposition than was previously the case."

Tags: banks CoFI conduct FAP FSLAA FSLAB insurers Kensington Swan Kris Faafoi legislation licensing MoBIE NBDTs

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Last updated: 11 November 2019 4:01pm

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