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SiFA: CoFI needs complete rewrite

Adviser group SiFA has called for the Financial Markets (Conduct of Institutions) Amendment Bill (CoFI)  to be completely rewritten – and warned that, in its current state, it could lead to adviser businesses being turned on their heads “with a stroke of a pen”.

Tuesday, May 5th 2020, 6:59AM 7 Comments

Murray Weatherston is SiFA's member for advocacy.

The deadline for submissions on the bill was extended to April 30 because of the Covid-19 outbreak.

SiFA made a submission that the bill should be sent back to officials for rework.

“We continue to be amazed that financial institutions have not pushed back very strongly against this legislation. Basically, financial institutions stand accused of doing bad things generally to their consumers, and having consistently failed to design products that benefit their consumers.

“This is arrant nonsense, and should not have passed even a first level reviewer.”

SiFA said that legislation needed to have a clear, substantiated target.

The bill was based on supposition, without strong evidence, that financial institutions had not been fair to clients, remuneration structures did not lead to good customer outcomes, and led to financial institutions and financial advisers implicitly mis-selling to their customers, it said.

The submission said advisers were already going through a period of significant change with FSLAA and this added another layer.

It would also mean financial product providers, who were already regulated through other Acts, had to obtain a second “conduct” licence.

“This will be a costly change with the businesses required to set up new departments to set out policies, procedures and controls to govern their conduct, and internal and external audit processes to ensure that they are complied with. This cost will clearly be loaded on to their consumers either as specific fees or by making their products more expensive than they would have been in the absence of such additional burden.”

The wording of the bill was too vague about what would constitute good conduct, SiFA said, and allowed for ministers and Government employees to increase the regulatory burden on the financial services sector with regulation and licensing conditions that would now have to be created by Parliament.

But what SiFA was most worried about was the section about “incentives”.

Product providers would have a requirement to design incentives and remuneration structures in ways that did not encourage poor customer outcomes.

“It seems that it would be possible under regulations to at one extreme abolish all commissions or at the other to put a cap on the allowable commission rate without any discussion with the industry. Before you say this couldn’t happen in NZ, let us ask you to take a look over the Tasman to the Trowbridge reforms of commission in the Australian life insurance industry.

“Of course, Government is making the soothing noises that this legislation is not designed to put a cap on or abolish commissions. That may be true but the bill contains a very simple mechanism to be used if tomorrow the Government just happened to change its mind. Who would bet against that possibility?

“We do not think that such extensive powers to regulate should be removed from the normal Parliamentary process … With a simple stroke of the pen, business arrangements which have served the test of time could be completely overturned.”

The bill requires that product providers have oversight of the conduct of all those involved in their chain of product development, distribution and client care.

SiFA said it understood the intention was to exempt financial advice because it was covered by FSLAA but the bill had not done that. Instead, it added more compliance on advisers.

“We think that the requirement for financial advice providers and financial advisers to comply with the good conduct programmes of every provider whose product they advise on will have the perfectly foreseeable result that many advisers will choose to limit the number of providers whose products they will use, and in the extreme will return to being effectively a tied agent to one company – not necessarily in the old way but rather forced into voluntarily adopting that position because of the regulatory impost of this bill.

“Whatever happened to the notion that before the Government regulates, it has a responsibility to show what the problem is, and identify the harm that is being suffered by the consumer?”

Tags: CoFI SiFA

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Comments from our readers

On 5 May 2020 at 9:43 am w k said:
murray: thanks for voicing our views.

were those so call consultations, submissions, feedbacks, etc from adviser (the contributions can all be binned) just a formality to get the new laws to be passed?

a friend once told me this, and i quote again: if you go hunting and just need a single shot to take your target down, why use a machine gun?
On 5 May 2020 at 11:01 am Pragmatic said:
Murray - you and I have had many discussions on the current and future state of the NZ financial services industry, and those who are empowered to oversee it. I genuinely trust your judgement and respect your intellect - and suspect that you're one of a small handful of folks who actually take the time to understand and think about this stuff.

The challenge for us all (least of whom people like yourself who are labelled as protagonists) is that the asylum has been run by the patients for years - with deeply indoctrinated processes and relationships shaping our future. That is not to say that change is impossible, moreso to acknowledge that those who are making the rules are doing this to benefit their masters, or by commissioning imbeciles to distract us all from the main game.

Keep fighting the good fight, and hopefully one day the rule makers & rule shakers will have the foresight to think about the shape of the industry beyond just an election cycle.
On 6 May 2020 at 12:33 pm Backstage said:
I agree wholeheartedly with the last paragraph regarding having to measure up to each suppliers scorecard. This could easily force a sole adviser to provide a very narrow range of suppliers.
On 7 May 2020 at 9:22 am Tash said:
I agree that much of the regulation on financial services seems over kill,based on supposed risks,poorly or not at all, differentiated between different advice or service type - so bad law (and please don't get me started on the concept of ensuring 'good customer outcomes' (avoiding bad outcomes is much better law - we have lots of experience identifying bad conduct and then specifying what bad conduct is, via criminal law, but who decides 'good'?)

Enough rant, why should all suppliers 'scorecards' be markedly different? There is only one set of rules and they apply to everyone, so I don't see how they could be so different an adviser properly complying would find that onerous. Yes, the scorecards could be different in practice between mortgages, investments, insurance etc but between fund managers? No I don't see it. Between insurers? No again the rules are the same for all insurance advisers.

Of course if different suppliers all have wildly differring opinions of what is required then we may well be creating one more nail in the coffin of true independent advice, AKA good customer outcome. Turkeys voting for Christmas comes to mind.
On 7 May 2020 at 9:46 am Bikedude said:
Tash, I think you have missed the point a bit here.There are already two sets of rules, one for VIOs and Nom Reps and one for Adviser companies. One would be very chuffed if the commission rules changed overnight outlawing commissions as they "pay on wages" so it wouldnt affect them distribute their own products, but it would impact the Adviser force beyond belief. Remember these clowns think that commission is remuneration, not income to a business.
On 8 May 2020 at 8:32 am Tony Vidler said:
Murray is absolutely correct on all points.

The COFI legislation is god-awful and I have been amazed that suppliers have generally been so reticent to publicly express concern. The vaguely described objectives are precisely why suppliers are already coming up with varying interpretations of what constitutes "a good client outcome" and I have grave concerns with the impact of wishy-washy subjective "scoring" systems which are linked:
1. to advice remuneration levels; and;
2. the ability to retain agency and the risk that presents to advisers business capital value; and;
3. the licencing jeopardy which is potentially created from subjective advice quality measures.

This last point probably concerns me the most. There are a number of issues here.
It is likely that a supplier company using its polling, or surveying, to determine "good client outcome" will get participation from the public at the extremes (those who are very happy or those who are very unhappy) with the vast majority of "satisfied" barely engaging in the assessment process meaningfully. There is a strong likelihood therefore of an inherent bias in subjective assessment systems of that type.

Further; any individual supplier trying to assess quality of advice in a particular instance will only be canvassing one element of the advice, being the suppliers own product placement within a much wider advice or engagement process. To go beyond that point would have them beginning to get involved in trying to determine advice suitability - and I don't think they want to go there. So the supplier focus will be upon whether the adviser has adquately covered Product A's features or issues, when in reality there were a Product B and Product C along with an Advice Strategy D covering 2 or 3 different advice business lines (e.g. risk + debt + retirement plan) all blended together in the same engagement. The actual "good client outcome" will be determined by the overall experience and composition of advice, service and product, yet there will be a supplier measurement system which does not take this into account - but will be reported to regulators and will be cause for supplier or regulatory intervention I suspect.

Put simply, enough red flags from the suppliers business intervention department, baased upon simplistic sampling and the adviseer probably has an unnecessary problem with a market regulator.

And I haven't even started on the crappy definition of "incentive" in COFI and the implications it carries for potentially amending remuneration models unilaterally at the stroke of some academics pen.

It is god-awful. Did I mention that?
On 8 May 2020 at 10:16 am w k said:
using my friend's quote, there are 2 basic approaches to a problem or potential problem:

1. the sniper approach - which requires skills and understanding of the situation. the job is done clean and simple.

2. the battalion or machine gun approach - where skills and understanding is not required. many men and weapons are involved, and the finish will be messy.

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