The Financial Markets (Conduct of Institutions) Amendment Act became law on 29 June 2022. Before that date it was nicknamed the COFI Bill, short for Conduct of Financial Institutions. Most of the Act is not in force yet; its likely start date is early 2025.
The genesis of the Act was the government’s concern that some financial institutions lack sufficient customer focus. One particular problem the government saw was financial service providers like insurers paying intermediaries who are acting on behalf of consumers, incentives based on the volume or value of sales made to those consumers. The government felt consumers needed to be better protected in this situation.
The Act is hard to interpret as it has definitions in different places and uses definitions in the Financial Market Conduct Act 2013 (which it will become part of), as well. As a result, it is hard to gain a clear picture of how the new regulatory regime works in practice.
At a high level, the Act:
• Requires the following institutions:
- Banks,
- Licensed insurers, and
- Non-bank deposit takers (finance companies)
to create and adhere to their own fair conduct programmes towards their customers, and
• Requires those same institutions, and any intermediaries that pay incentives to their employees or agents (or another intermediary) in connection with the sale of the institution’s services to consumers, to adhere to new regulations (not yet released) that govern those incentives.
The definition of ‘intermediary’ is very wide. It includes both direct intermediaries and any sub-intermediaries under them.
The definition of ‘incentives’ is very wide and will catch any monetary or non-monetary benefit directly or indirectly paid. Traditional commission payments based on a percentage of the premium are caught. Profit shares are also be caught.
The key limitation on the application of the new regulations is that they only apply to contracts of insurance entered into with consumers. A consumer is defined as a policyholder who enters into the contract wholly or predominantly for personal, domestic, or household purposes. Note the test appears to be subjective – it is the purposes of the actual policyholder concerned that counts.
Where there is a dispute about policyholder’s purpose, the onus is on the insurer/intermediary to prove that the policyholder is not a consumer.
A contract of insurance is deemed not to have been purchased by a consumer if the policyholder certifies in writing before entering into the contract that it is wholly or predominantly for business purposes.
The exact impact of the new regulations on commissions and other incentive when entering into a contract of insurance with a consumer are not clear as the government has not released the new regulations yet!
Please feel free to contact us if you require any further information.
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Crossley Gates | cgates@keegan.co.nz
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Frank Rose | frose@keegan.co.nz
