The Conduct of Financial Institutions bill is expected to have its first reading soon after Parliament reconvenes for the new year in a fortnight.
The bill introduces new conduct obligations for banks, insurers and non-bank deposit takers.
A regulatory impact statement said it was likely to mean a large increase in costs for the Financial Markets Authority through administration and monitoring work.
One of the potential unintended impacts of the bill was the possibility of less access to advice, the statement said, but that was seen as moderate to low because “the most intrusive regulatory options” had not been recommended, which meant there was less risk of wholesale changes to business models and cash flows, MBIE said.
But that does not mean that adviser models will be left alone.
The bill requires that banks, insurers and non-bank deposit-takers meet obligations in relation to how they design their incentives for staff and advisers.
That would mean understanding the risk of mis-sale they created and working to reduce that risk.
MBIE noted that could mean a reduction in upfront life insurance commissions.
In its current form, the bill would also stop financial institutions offering volume-based sales incentives or remuneration.
The regulatory statement said while FSLAA contained a conflict of interest duty, it focused on managing conflicts, not reducing them.
“Product manufacturers are free to create incentives for financial advisers (whether intermediaries or “in-house”) to prioritise their own interest."
Non-regulatory options were unlikely to lead to enduring positive changes in the sector, MBIE said.
“The characteristics of financial products and services mean that some underlying issues such as information asymmetry, conflicts of interest and an imbalance of power exist. Conduct and culture problems in the industry mean that institutions may not take these underlying characteristics into account or are able to take advantage of them.”
MBIE noted that there were signs change was not happening as regulators might wish.
“While some life insurers are making positive changes (for example by amending their adviser agreements with a revised set of obligations to enable more effective oversight) we have also seen an example of a life insurer reassuring its advisers that they do not need to be concerned about changes to either commissions or adviser agreements in the next 12 months, unless required by law or regulation. Overall, in the life insurance sector there has been little movement in the levels of high upfront commissions, and sales incentives based on value/volume being retained.”
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