Second reading passed
The Financial Markets (Conduct of Institutions) Amendment Bill passed its second reading in parliament on May 12 and will proceed to the Committee of the Whole House.
The Bill, criticised by many participants in the financial services sector, and political parties including National and ACT, will progress through the legislative process as it looks set to become law.
However, a Supplementary Order Paper many hoped would resolve key issues has not yet been published.
The SOP is circulating in a “targeted consultation” and is expected to be introduced ahead of the Bill’s third reading.
CoFI has been criticised across the financial services industry. The first reading of the Bill triggered fears that the new law would capture brokers, and force intermediaries to be part of financial institutions’ conduct regimes.
Insurance brokers had expressed fears that they would be fully captured by the Bill and regulated twice — once by CoFi and also by the Financial Services Legislation Amendment Act of 2019.
However, recent noises from Cabinet suggest the law will not capture brokers directly at the legislative level. Brokers are not expected to be captured by insurers’ conduct regimes. Rather, insurers are likely to be responsible for ensuring brokers and distributors treat customers fairly.
As the broking market awaits the SOP and further clarity, the Labour-led government is keen to press ahead with the legislation and impose the new law before next year’s general election. The law could be passed by the middle of this year.
In May, MPs including Ingrid Leary spoke in support of CoFi and said the Bill would address the balance between consumers and financial institutions.
The Opposition hit out at the Bill in its current form, however, and warned of unintended consequences from the code of conduct regime.
CoFi progressed by 77 votes to 42 in parliament, with support from the Greens and Te Pati Maori. ACT and National voted against the Bill.
Cabinet Paper
In March, Commerce Minister David Clark published a cabinet paper on the incoming legislation. In it, the minister confirmed that the Bill would ban all volume-based sales incentives on financial products for so-called ‘frontline’ operatives.
The regulation will “expressly prohibit financial institutions and intermediaries from offering sales incentives based on volume or value targets to their frontline employees, agents and intermediaries”.
The cabinet paper promised CoFI amendments would be made through the Supplementary Order Paper to limit the definition of intermediary to those “engaged in selling or distributing products or services to consumers”.
“This means financial institutions will have responsibilities under the Bill to oversee these parties (e.g. financial advice providers such as insurance or mortgage brokers, retailers selling add-on insurance or credit) but not parties involved in broader preparatory, administrative and claims fulfilment services (e.g. lawyers, plain English writers, panel beaters in relation to motor vehicle insurance),” Clark said.
What happens next
All eyes are on the SOP, which will reveal the full extent to which brokers are captured under the legislation. The cabinet paper and recent roadshow updates from the Financial Markets Authority suggest brokers will not be part of insurer/product provider conduct regimes.
David Ireland, a partner at law firm Dentons Kensington Swan believes the long-awaited SOP will provide welcome clarification for brokers.
“Cabinet’s position has been that we will see the SOP narrow the scope of who will count as an intermediary, being limited to those involved in sales and distribution, as opposed to the much broader class that had originally been envisaged.
“And then the SOP is also likely to limit the financial institutions’ obligations in relation to those intermediaries through monitoring,” Ireland adds.
There is an expectation that brokers will not be part of an insurer or product providers’ code of conduct regime, he said.
“That’s quite significant,” Ireland adds. “A lot of the pushback at the earlier stages of the Bill was over how much financial institutions would need to dive into the weeds with intermediaries and how products were being distributed.”
Ireland says regulators are keen to pursue a “common sense” approach.
“The Financial Markets Authority gave a briefing session and said they don’t want a financial institution to be auditing individual [intermediary] files, but rather looking at the overall governance process of the distributor.”
“We expect that financial institutions will have to satisfy themselves that the broking firm has the appropriate processes in place. At the simplest level, the insurer or product provider will need to know if the broker is treating the customer fairly.”
He says the CoFi Bill following the SOP should be “more right-sized than it was when originally proposed”.
“One of the big pluses for broking firms is that their need to comply with a dozen different conduct programmes is now gone. You won't need to follow conduct rules for each different institution. Rather, all of them will be monitoring your expertise as a broker and that you’re observing the principles at a higher level. Different instituions will take different approaches.”
Ireland called on the broking sector to engage with the FMA as its guidance on the new law unfolds, and said the level of engagement from MBIE and the financial watchdog had been encouraging so far.
Overall, Ireland is confident that insurance brokers and other intermediaries in the financial services sector have avoided a worst-case scenario, compared to the first drafts of the CoFi Bill.
“They [brokers] have very much dodged a bullet,” Ireland adds. “Since the Bill was first introduced, there have been some fairly material changes, and what has been proposed and what we hopefully end up with will be far more workable than what was envisaged. The state of alarm at the first reading of the Bill is now diminished.”
Despite this, he acknowledges that brokers and other intermediaries will have “a significant extra layer of responsibility placed on them as part of the conduct and culture journey” as financial institutions fall under the new law.
“Financial institutions will want brokers to be pulling in the same direction in terms of treating customers fairly, so there will be more processes to follow.”
The IBANZ view
IBANZ chief executive Mel Gorham says the organisation “continues to be fully engaged on the CoFi Bill and SOP”, “as we endeavour to avoid the foreseeable issues we have constantly warned about throughout the consultation, being the reduction in choice, competition and the availability of independent financial advice for consumers”.
She adds: “We are supportive of raising the standard of professionalism across the industry as well as the forums that the FMA is putting in place this year to help provide clarity. We are pleased that the FMA has acknowledged the issues we have raised as well as their role in providing assistance and guidance on what fair treatment looks like whilst not overburdening the sector and bringing about unintended consequences.”
At this stage, Gorham says IBANZ “remains firmly of the view that a distinction needs to be made under CoFi in respect of treatment of intermediaries that are licenced under FSLAA and subject to significant conduct obligations under that legislation, and those that are not”.
She adds: “The latter require firm oversight by the Financial Institutions they are selling products for. We also remain concerned over a potential divergence of interests between an intermediary licenced under FSLAA which is required to give advice on an individual basis whilst avoiding and appropriately managing conflicts of interest and a financial institution which is not.”
