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CoFI adds more challenges to financial services

Financial advice firms, insurers, banks and related institutions should prepare now for the impending implementation of CoFI legislation or risk being bogged down by further regulations.

Thursday, November 25th 2021, 7:33AM 9 Comments

by Matthew Martin

While the Financial Markets (Conduct of Institutions) Amendment Bill (CoFI) is still more than six months away from being passed, industry experts say businesses should already be preparing for its effects on conduct and commissions.

Parliament began the Bill's second reading on June 10, but the Bill has remained on Parliament's Order Paper due to Covid-19 restrictions since then.

However, viewers of yesterday's Financial Services Council webinar - "CoFI in Focus" - were given some strategies to overcome the challenges of implementing the Bill when it is expected to be passed around July next year. 

CoFI will see businesses needing to apply for a new conduct licence from the Financial Markets Authority (FMA) for the principles-based scheme that will also limit the payment of incentives-based commissions and set out what is required for the conduct of intermediaries.

Head of conduct and culture at AIA, Amy Cunningham says the insurer has already started implementing good conduct principles by including them in adviser agreements and mandatory conduct training for staff.

She says businesses should be pulling resources together now and setting "the tone from the top" is also important.

Cunningham says CoFI probably won't be as challenging as FSLAA and that most of the industry has already removed soft incentives - but advisers will always pay to the whistle - "a lack of transparency around commissions can be problematic".

Lawyer Tim Williams, a partner at Chapman Tripp, says while a lot of detail is yet to be revealed, especially on how CoFI will affect intermediaries, he expects linear commissions will still be acceptable and would like to see more guidance on the definition of the term "fairness".

He says due regard has been given to the interests of the consumer, "...but this is a very opened ended definition and leaving it to the courts to determine this would be a very poor outcome".

"Fairness should take account of both sides interests - but there is no recognition balancing the needs of providers."

Partners Life chief risk officer Beckie McCleland says incentives are not necessarily bad and can be supportive of advisers and customers with possible solutions being a fee for service or package solutions being implemented.

She says CoFI and FSLAA are complementary pieces of legislation and hopes they don't double up on regulatory requirements for small to medium-sized businesses that are already dealing with challenges around FSLAA.

Better use of technology, especially data and analytics, will also be important, says Compliance Refinery director Steve Burgess.

"How to identify risk points and when clients need to be serviced should also be looked at now...but it's an opportunity for businesses to rethink their models and get organised for the future."

Burgess says putting fresh systems in place could be expensive and advisers should be wary of what is contained within agency agreements and what they are signing up for.

The FMA's director of banking and insurance Clare Bolingford says the regulator wants to work with the industry and is preparing a dedicated team to support the implementation of CoFI along with its licencing approach, monitoring framework and engagement model.

She says the FMA has learned a lot from FSLAA and will try not to double up on information already collected for the financial advice licencing process.

The FMA will use a tailored approach depending on the type of entity it is dealing with, its size and the risk they pose to consumers.

"This is not just saying the customer is always right, but there is a balance and all sorts of considerations are taken into account...and we will share good practise examples when we see them."

Tags: CoFI Financial advice financial advisers FMA FSC FSLAA

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Comments from our readers

On 25 November 2021 at 11:00 am Amused said:
The CoFI legislation would seem in part to be targeted at override payments made by insurers to dealer groups. These groups who don't actually give any advice to a client. Transparency around these overrides payments is long overdue for the insurance industry. Great that Partners Life lead the pack and now pay the overrides directly to the adviser giving the advice to their client instead of the group.
On 25 November 2021 at 11:30 am valkyrie6 said:
Hang on a minute, are you saying dealer groups get a special override commission paid to them directly as part of each new insurance policy that’s issued to customers? on top of the adviser’s commission? gee I really hope this is being disclosed to the customer, the consumer needs full disclosure of what behind the scenes payments are being made and to whom, I have a sneaking feeling customers don’t even know what a dealer group is let alone what an override commission payment is, looking at multiple advisers disclosure statements there is no disclosure around who is the dealer group , who owns the dealer group ( are they overseas owned) , who’s in possession of the customers personal banking and heath information, who’s getting paid an override commission and why .
Regulation has a long way to go.
On 25 November 2021 at 5:22 pm LNF said:
Does anyone know how any individuals have completed the process and been registered under the 2022 regulation requirements
On 26 November 2021 at 6:52 am Murray Weatherston said:
Am I the only reader who doesn't understand LNF's question?
The COFI legislation hasn't been passed yet so the final form isn't finalised yet.
While financial institutions will need to get separate conduct licences, I don't think advisers need them.
The key for advisers will be how much supervision their manufacturers will want to impose on them to meet the manufacturers obligations under their conduct licences.
Its just another layer of regulation on advisers.
On 26 November 2021 at 10:10 am LNF said:
Question to Murray, who is more "up with the play" than I will ever be
Going into the future 2022 and beyond, how many individual Brokers / advisers / agents will be able to continue to trade in their own right without any further form filling or registration requirements or upskilling.
From what I gather, and I could be wrong, most are termed "interim" registered
It is not a leading question, I would like to know the collateral damage to the advice industry and how many people have departed the industry.
I am a "Departed"
On 26 November 2021 at 10:33 am w k said:
@murray:"Its just another layer of regulation on advisers". i think you meant another layer of jobs created.
just back from meeting with client, he's looking to hire. no wonder there are so many jobs out there.
to read in between the lines of the you know who - it's time to say farewell, advisers, there are plenty of jobs out there waiting.
On 26 November 2021 at 11:58 am Amused said:
@ w k - well said. Many experienced advisers will likely make the move into another industry at this rate if regulation keeps going the way it is. What a wonderful outcome for the NZ consumer.

Regulation of the financial services industry is all about jobs and money. If anyone thinks otherwise then sorry you have your head buried in the sand.
On 26 November 2021 at 12:27 pm Murray Weatherston said:
@LNF FYI I am also a departed. (Part old age, part having enough capital to see us out, but actual timing largely regulatory overload.)
I think the only answer to your question "how many individual Brokers / advisers / agents will be able to continue to trade in their own right without any further form filling or registration requirements or upskilling?" is no-one.
Take competence for example, it will not surprise me at all if Level 5 equivalence is only an interim staging post, and in the near future, that will change to Level 7 or degree. That's the situation ahead in Australia and they are staring down the barrel of a(nother) big adviser exodus over the next 4 years.
IMO, the officials who determine the policy will just never be satisfied about anything.
The new recruits to the regulators will have read about something more that they can champion in their stay in what is often a revolving door position.
My big beef is actually that there is never any proper cost benefit analysis. Everything is said to be "for the benefit of the consumer" as though that justifies anything. But one day the consumer advocates might wake up and see that the costs of supplier compliance are rising every day, and that it is the consumer who is actually paying those costs by way of higher fees and interest rates.
I think the Regulatory Impact Statements provided by Government and officials are largely a crock and are nothing more than a tick-cross explanation (sans any calculations supporting) of which options of the ones they considered they preferred.
IMO Treasury has lost the hard analytic focus they used to have - they too are into feelings over facts. That's a big loss of c0nsumer welfare.
On 27 November 2021 at 12:29 pm Tim Williams said:
It is currently unclear the extent COFI will impact on intermediaries, so it is too early to say if CoFI will heighten the regulatory burden on advisers.

Initially there was going to be considerable additional requirements on intermediaries, but industry submissions including those from IBANZ, FSC, FSF successfully persuaded MBIE to remove them, largely on the basis that they would duplicate the FSLAA initiatives.

But then it was found that the removal of direct requirements on intermediaries had been replaced with financial institution obligations which would mean intermediaries would be subject to similar responsibilities indirectly.

Again the industry groups and others responded to MBIE that the Minister’s assurances that intermediary requirements would be removed, would not be carried through in practice.

We are waiting for the outcome of another round of consultation, but feedback is that MBIE is listening and changes will be made to ensure that the financial institutions’ fair conduct programme requirements will not impose significant burdens on intermediaries, that the FSLAA reforms will be given the opportunity to work before any further changes are made, and that a principles approach will be adopted.

We await the outcome of this process before we can say the desired outcome has been achieved.

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