A bill that will put more conduct obligations on insurers has passed its first reading in Parliament.
The Conduct of Financial Institutions Bill was drafted after reviews by the Financial Markets Authority and Reserve Bank, which were critical of banks and life insurers.
It requires insurers, banks and non-bank deposit takers obtain a licence from the FMA, as well as their other regulator-required licences.
It also requires them to comply with “fair conduct” principles to ensure that customers and consumers are treated fairly. That will mean paying attention to their interests from the design of the products to after-sale client servicing.
They will also have to have a conduct programme to back up their adherence to these principles, enforcing client-first obligations at all levels of the business.
Insurers will also have to ensure that their brokers comply with that programme. Volume-based incentives for staff and intermediaries are set to be banned and there will be regulations determining how other remuneration structures can be set.
The Ministry of Business, Innovation and Employment has acknowledged that may mean a reduction in upfront commissions for life insurance advisers.
“The recent reviews, by the Financial Markets Authority and Reserve Bank of New Zealand, into the conduct of banks and insurers found factors such as target-based sales incentives were leading to behaviour that put profit ahead of people,” Commerce and Consumer Affairs Minister Kris Faafoi said after the bill was referred to select committee.
“The Financial Markets (Conduct of Institutions) Amendment Bill delivers on a number of changes to require banks, insurers and other financial service providers to have the right systems in place for ensuring they treat their customers fairly.
“Last year I announced a ban on incentives that are based on meeting sales targets, along with a new conduct licensing system for banks, insurers and non-bank deposit takers, such as credit unions.
“These measures will be implemented through obligations for licensed entities to have in place and comply with programmes
outlining the standards of fair conduct their business operations will need to meet.
“The conduct programmes will also apply down the chain to intermediaries that licensed entities use to distribute their products and services,” Faafoi said.
To support the bill, the FMA will have a wide range of tools to require financial institutions to make changes to their business.
“Since the conduct and culture reviews, the Government has moved swiftly to see that the industry addresses conduct and culture issues.
“The Government also recently announced changes to make insurance contracts fairer and more transparent for consumers. These changes will complement the new conduct regime by ensuring customers understand their policies and are treated fairly in all their dealings with insurers,” Faafoi said.
National is not supporting the bill in its current form. MPs highlighted particular concerns about the potential for adviser commissions to be limited in a way that disrupted business structures.
Industry commentators have also raised concerns about the potential duplication of obligations when this bill is viewed alongside the Financial Services Legislation Amendment Act, which introduces a code of conduct for financial advisers.
