In September last year, consumer affairs minister Kris Faafoi unveiled plans for a new conduct regime for the financial services sector. The reforms, launched off the back of Australia’s damaging Royal Commission into financial services and the Reserve Bank and Financial Markets Authority’s review of New Zealand’s life insurers, have quickly gathered speed.
The Conduct of Financial Institutions Bill (CoFi) will force insurers to have a conduct regime in place to guard against unfair behaviour towards consumers. It has been introduced to address concerns around customer treatment and will introduce a “fair conduct principle”, requiring institutions to treat customers fairly and act in their best interests.
The fair conduct principle will come into effect when financial institutions provide or design a service or product to the consumer, or deal with a customer concerning existing products. Insurers will need to demonstrate their robust processes to the regulator.
Laws face a long journey through the parliamentary process, yet CoFi has been before the Finance and Expenditure Select Committee, with submitters making their voices heard about the new regime.
There were initial fears that the legislation could capture intermediaries, forcing brokers to comply with different suppliers’ conduct programmes, as well as the looming Financial Services Legislation Amendment Act (FSLAA), which is due to come into effect from next March.
CoFi was reported back to Parliament on August 7, allaying many fears for the broking industry.
Advisers successfully lobbied to exclude financial advisers from the scope of fair conduct programmes, and the amended bill will only capture financial institutions. However, financial institutions will be tasked with training and supervising intermediaries to ensure they support the institution’s compliance with the fair conduct principle.
What will the fair conduct principle for insurers look like?
Insurers will have to “pay regard to customers’ interests”, “act ethically, transparently, and in good faith”, “assist consumers to make informed decisions”, and ensure that the service or product “meets the requirements and objectives of likely consumers”. Financial institutions cannot subject consumers “to unfair pressure or tactics or undue influence”.
While CoFi initially gave the government far-reaching powers to regulate remuneration structures between insurers and advisers, the amended bill has some safeguards in place. The select committee’s report says the law should have some restraint on the government’s ability to ban incentives.
A minister will have to consider “certain matters” (such as the impact on advisers and whether primary legislation is more appropriate) before recommending further regulation on incentives. There are fears that even under this revised wording, regulators still have the power to tinker with remuneration.
The August 7 report confirmed that the regulation of broker incentives was “not the policy intent of the bill”: “We recognise that if the government had intended a total ban on all incentives, it would have been more appropriate to do this through primary legislation.”
The commencement of the bill has been delayed until the third anniversary of the date of its Royal Assent. The additional time will be welcome news to mortgage advisers, who must contend with their own wide-ranging reforms under the FSLAA changes, set to come into full effect from March 2021.
Brokers appear to have avoided a worst-case scenario and will not be forced to comply directly with insurers’ conduct regimes, or face easy interference over remuneration. But the new laws, which will plug into the Financial Markets Misconduct Act, will usher in a new era for insurers, and by proxy, impact the day-to-day dealings brokers have with suppliers.
Insurers are the main target of the new regulation, and there are key questions on how it will change the general insurance sector. What kind of behaviour is the regulator looking to stamp out? How will insurers demonstrate their processes? How will the insurer-broker relationship change? What does it mean for customers?
Dentons lawyer David Ireland believes insurers will face more scrutiny around how they pay intermediaries, particularly how much they remunerate brokers up-front for bringing in business from another provider.
Ireland adds: “In the insurance space, one of the constant issues the FMA focuses on is replacement business. And the incentives that are paid to intermediaries to replace insurance cover [from another provider]. If you do that constantly, it is churning the customer’s cover, and often contrary to the best interests of the consumer.”
The regulator will also look out for “no service” charges to the customer — people being charged for products they are not receiving.
“That’s the sort of conduct obligation the new regime will be looking at imposing on banks and insurers,” Ireland said. “The regulator is not so much saying ‘you’ve been bad and we need to rein you in’. They want insurers to have good conduct programmes and systems in place so that directors of financial institutions can have assurance that good words and rhetoric flowing from the top is being implemented at the coalface.”
The increased focus from regulators is likely to make insurers pay closer attention to their customer processes and dealings with brokers. The regulator has an “extensive toolkit”, to enforce against insurers under the new regime, Ireland says.
“They can take action that is appropriate to the level of non-compliance and risk of consumer harm they have identified. That extends for the potential to push for fines of seven figures at the extreme end. But the most significant power the FMA has is the power of the media release. It’s all about the reputation of these providers. No institution wants to be in breach, because the consumer will not be impressed.”
“The biggest threat the regulator will have is to remove an insurer’s conduct license,” Ireland adds. “If they pull that away, they are out of business. It’s an existential regime for everyone that’s in scope, and they will have to get it right. The institutions will need to put comprehensive programmes and systems in place to make sure that they are treating customers fairly.”
That in turn, could make things more difficult for brokers, Ireland adds. “It makes it harder for anyone the providers do business with. There’s a whole lot of red tape, checks and balances that will need to be navigated. It’s quite an amount of resource that a financial institution will need to have onboard to monitor that programme, and make sure everything is being followed.”
“That all comes at a cost, and the consumers could end up having to pay for that,” he adds. “That’s why this reform has to be right-sized for the problem.”
Insurers are busy getting to grips with the potential changes. Vero is optimistic about the new regime.
Helen McNeil, chief risk officer at Vero, says regulators want to stamp out confusion and any surprises customers might face when they take out insurance products.
“Kris Faafoi wants to make sure the intermediated insurance market ensures the best quality advice so the customer gets the product they need.”
“Our approach has been not to fret too much, as we are already working on our own conduct uplift programme,” she adds.
McNeil says Vero is hard at work improving its conduct processes ahead of the laws, “turning the business inside-out looking for any areas of unintended risk” for customers, “or anything that might lead to unexpected outcomes”.
The new regime will prompt insurers to make documentation and communication clearer for customers, she adds.
“A key part is making insurance easier to understand, and doing a lot of work around communication. We have also done work around how we respond to feedback and customer complaints. We want to be able to take feedback and respond and turn that into good outcomes,” she adds.
“What we are doing here will be aligned with whatever principles-based regulatory programme that comes along. We’re doing that because that’s where we’re heading, and that’s the right thing to do,” McNeil says.
McNeil argues the new regime could even make brokers’ work easier, with clearer documentation to work with.
“The more easy-to-understand we can make our policy documents, we can save the adviser from having to translate, and they can just talk about the value, and pros and cons, because the information is clearer. It will be a great advantage, and brokers can feel more confident with customers. They will know insurers have strong processes and procedures.”
McNeil says Vero will not have to change the way it pays brokers, as the insurer already pays “commission arrangements carefully, to make sure they carefully remunerate advisers for their cost and their time”.
She adds: “The value-add advisers bring to our customers is one they need to be fairly remunerated for. We do that and regularly review our arrangements to make sure people have access to the advice they need.”
McNeil doesn’t expect CoFi to radically change the way Vero or the wider sector deals with intermediaries.
“We’re very fortunate. The advisers we work with are totally aligned. They want to provide good customer service and outcomes. These are our mutual customers. Anything we can do to maintain that is a real positive outcome for intermediaries as well. We are all heading in the right direction. I haven’t had anyone we work with saying it’s a bad thing for the industry. If it’s done appropriately, it can only be a good thing.
However, McNeil says it is important that the new regulation is not “unwieldy”, and interacts with other new legislation, like FSLAA and insurance contract law review, without getting in the way.
She expects insurers’ programmes to converge to similar best-practice principles.
“Broadly speaking, there will be some fundamentals that will be obvious,” she says. “After a while, I’d like to see two-way dialogue, with advisers telling insurers about how others are doing it. We might get to a market best-in-breed approach.”
Mel Gorham, chief executive of IBANZ, welcomed the recent changes to the CoFi bill as we look ahead to the next stage of its development.
“We’re pleased to see that a number of aspects we submitted on have been taken into account,” she said. “The removal of the duty for intermediaries to comply with other fair conduct programmes was a priority for IBANZ, and a sensible outcome as members’ conduct will be regulated when the new financial advice regime comes into force March 15 2021.”
Gorham said the bill’s increased focus “on the conduct of financial institutions should, coupled with the new financial advice regime, help bring about better outcomes for consumers, particularly against a backdrop of continued, meaningful consultation. The greater clarity regarding the fair conduct principle and treating consumers fairly is also welcomed.”
The road ahead
CoFi’s commencement has been pushed back for another year, giving insurers and brokers more time to adjust, but its journey through Parliament is likely to continue.
Labour, the leader of the coalition government, is known to be keen to push the legislation through, and is currently polling ahead of its rivals ahead of the October general election.
However, National is said to be against the bill. A National win could see CoFi tossed to the scrapheap, or at least heavily watered down.
Other unknowns, such as Covid-19, could slow down the progress of the bill when Parliament returns. It is unclear how the delayed election, and resumption of Parliament, will affect the timeline.
Ireland predicts the bill will go to the “bottom of the pile” when the next government forms, “to resurface later on, depending on the reform agenda of the next government.”
While Gorham is positive about the changes to the bill, she knows there is plenty of consultation and debate to come.
“Undertaking the further consultation referred to by MBIE in a transparent, measured way will help minimise the chance of unintended consequences,” she adds.
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