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FMA reports on 'watershed' year

The Financial Markets Authority says it's had a significant year as the financial services sector moves to a new regulatory environment.

Wednesday, October 30th 2019, 9:55AM

It has released its latest annual report, which showed it turned in a bigger deficit than expected -$177,000 compared to a budgeted -$80,000. It overspent its litigation budget, with a litigation deficit of -$969,000.

The FMA said it had been a watershed year because the Financial Markets Conduct Act was fully implemented and normalised across the financial sectors the FMA regulates.

The regulator said its work this year in the adviser market had focused on building systems to support the application process for transitional and full licensing, creating guidance documents and communicating updates to the current adviser population, and engaging with industry to help them understand their options and obligations under the new regime.

Its review of bank and life insurer conduct was the single largest thematic review the regulator had undertaken and dominated activity for the year.

The process involved 650 interviews with 870 staff.

But the FMA said its report into how QFE insurance providers mitigated risks through operational policies and procedures when selling replacement products was disappointing.

“We found that advisers do not sufficiently acknowledge that replacement business creates conflict risks that need to be managed carefully.

“Given the level of attention we have already devoted to this issue, it was particularly disappointing to see the lack of maturity in managing conduct risk that was highlighted during the Life Insurer Conduct and Culture review.”

The FMA said areas of its activity had fallen behind as it reallocated resources to the conduct and culture review.

“This was reflected in some of our annual performance measure results, but we were back to full strength in most of our functions by the end of the year.”

One of the statement of intent measures that was not achieved was having licensed market participants that showed how they could achieve good outcomes.

"The standard of our findings from monitoring reviews dropped to 20%, from last year’s 47.8%, resulting in this measure not being achieved," the FMA said.

"Following our monitoring reviews, we were only satisfied with two entities out of the 10, where their boards had shown commitment to strong customer proposition and information about customer outcomes was in development.

“We also completed full assessments on five of the entities’ risk and compliance frameworks, and were only satisfied with one entity, which had started to embed good customer outcomes into its practices. Because the entities we reviewed were selected based on risk, we think it is likely that the result for these 10 entities is lower than it would be for the licensed population as a whole."

A performance measure that was not achieved related to investigation and enforcement activities being undertaken and completed according to agreed timeframes.

Only 73% of misconduct cases were closed within 39 working days of the information being received against a target of 80%.

“Staffing levels were a factor in these misconduct case targets being missed, with multiple staff who are typically involved in assessing cases being allocated to the Conduct and Culture reviews on a full-time or part-time basis for various lengths of time throughout the year.”

But it said it addressed misconduct in a number of ways, including a variety of court proceedings (both civil and criminal), an enforceable undertaking, and public warnings.

FMA chief executive Rob Everett said credible deterrence had always been critical to its mission to promote fair, efficient and transparent markets.

A noteworthy litigation success was the proceeding versus ANZ, which was resolved in the Supreme Court in April. The court decision established the right for the FMA to share information with Ross Asset Management investors about ANZ’s role as banker during the period David Ross was operating a Ponzi scheme.

Everett said: “Responding to ANZ’s action against us was long and costly, but it was an important battle to establish the right for investors to exercise their private rights to make a claim.

“We recognise that being more active in the enforcement space is costly. This year we far exceeded our litigation budget, although we were able to cover the overspend from our reserves.”

The Government has this week approved an increase in the FMA’s litigation fund for the current year: “We are pleased this additional funding has been confirmed for the current year so we can maintain our momentum as an active regulator.”

Tags: Financial Markets Conduct Act FMA regulation

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