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CoFI submitters: Slow down

New Zealand’s financial services sector has asked for more time to be spent on developing the Conduct of Financial Institutions Bill – and warned there could be unintended consequences of the bill in its current form.

Monday, June 8th 2020, 6:27AM

David Ireland, Dentons Kensington Swan

Select committee submissions have been made public on the bill.

While submitters voiced support for the overall intention of the bill, all raised concerns about how it has been drafted.


Significant concern related to how advisers will be dealt with under the bill. There is a carve-out for financial advice providers, but not necessarily for individual advisers, in its current form.

That could mean all advisers had to show compliance with the financial advice providers’ conduct programme, as well as meeting their own obligations under FSLAA.

Fidelity Life said that could mean that advisers had to comply with multiple fair conduct programmes, which could be problematic for them and confusing for consumers.

“We want to ensure that regulation does not discourage the role of independent financial advisers or reduce the independence of their advice, both of which would not be in consumers’ best interests,” the insurer wrote.

“We want to ensure there’s no compliance burden on financial advisers having to comply with multiple fair conduct programmes. This would increase compliance costs which will ultimately be borne by consumers. This could also result in financial advisers limiting the products they provide advice on, becoming tied agents of one product provider or leaving the industry altogether.”

She said it would be critical to ensure that compliance costs did not increase to the extent that insurers had to push up the cost of cover.

Cigna chief executive Gail Costa said it could mean that advisers who had to navigate a range of conduct programmes ended up favouring one provider over another to simplify their compliance obligations.

“This generates a conflict of interest – rather than independently recommending products based on customers' needs and suitability of the product, intermediaries may be influenced to recommend products based on their individual compliance preferences.

“We would also welcome further clarity on the extent to which our business is expected to ensure that every intermediary involved in the provision of our services and products is compliant with our fair conduct programme. We are keen to understand whether there is an expectation that the duty to take ‘reasonable steps’ will go beyond regular training on new products and refresher training as well.”

Partners Life said financial advisers should not be caught by the bill at all. AIA said only those who were not licensed under FSLAA should be affected – and said even the carve-out for FAPs did not go far enough because they could still be caught when they were doing something that did not count as giving regulated financial advice – such as discussing premium payment options.

“This places financial advice providers in a difficult position. Not only will they have to comply with their own conduct obligations under the Financial Services Legislation Amendment Act (FSLAA), conditions placed on them by their licence, the Code of Professional Conduct for Financial Advice Services and existing legislation, they will also have to comply with the fair conduct programmes of multiple providers. This is likely to be unworkable for the financial advice industry which is already subject to significant reform.”

AIA chief executive Nick Stanhope said his firm was supportive of FSLAA but the impact on advisers should not be underestimated.

“Regulatory change puts significant stress on advisers, many of whom are small business owners with limited resources to manage such change. The additional layer of complexity that the bill introduces will put additional stress on advisers and may result in some advisers leaving the industry.”


Submitters were concerned that the bill left open the option of regulators introducing new rules for commission structures, without any legislation change being required.

“The fact that prohibitions or constraints unrelated to volume or sales targets could be imposed on the industry by regulation, without the transparency and rigour of the process involved in legislative amendment, creates an unacceptably high level of regulatory risk for market participants in New Zealand,” Stanhope wrote.

“This creates excessive business uncertainty for financial institutions and intermediaries who rely upon the provision of financial rewards for their businesses to function, or who are looking to invest long term in the New Zealand market.”

David Ireland, a partner at Dentons Kensington Swan, said commission regulations could potentially be brought in without the rigour usually applied to legislative development.

“Given the potential disruption to longstanding commercial arrangements that would arise through regulating incentives under such a wide power, and the threat this creates to the viability of small business relying on commission flows from the financial institutions they are involved with, we believe it is imperative that far tighter parameters be placed around the ability to regulate incentives.”

Fidelity said it could create uncertainty in the industry and affect participants’ ability to undertake planning for the future.

“It’s important to future-proof the regulation of sales incentives and commission to ensure a sustainable model for both consumers and the industry.

“To provide some certainty we think the bill should specify at a high level: what types of incentives can be curtailed or banned; what positions/roles/job titles the regulations can apply to; what is considered an unacceptable rate of commission; and what financial institutions will be required to do to ensure their intermediaries/third party distributors comply with the regulations.”

But she said the industry was not able to self-regulate on commission because of competition law and action was needed to ensure the industry was efficient and sustainable.


Many submitters were worried about the scope of the new bill. Some said it was too broad – AMP Wealth Management New Zealand said it was concerned about being included as a financial institution – the cost of licensing would affect its ability to keep costs down. The Securities Industry Association said it seemed that NZX trading, and advising market participants, had been inadvertently captured as intermediaries.

But Partners Life said there was a risk it would create an uneven playing field – a customer would have protection through the bill if they were in KiwiSaver through a bank but not through a fund manager.


Many called for more time to be allowed before the bill came into force.

Stanhope said FSLAA should be given time to be implemented and embedded before more regulation rolled out.

Ireland said CoFI had not had the benefit of the usual robust consultation that would come with such a significant regulatory regime.

“No consultation draft was released for public feedback, with no opportunity to debate the outcome of the one round of consultation on the issues paper released last year. The outcome is a bill that provides a framework for a new regime, but with many of the details not fully formed and with many uncertainties as to scope and practical application.

“Conduct licensing is complex. A new regime as significant as this one ought not to be rushed through.”

Tags: AIA AMP Cigna CoFI David Ireland Fidelity Life FSLAA Partners Life

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