Insurance

In May 2017, the results of New Zealand’s latest financial health check were published.  The International Monetary Fund (IMF) found that New Zealand did not meet international standards for regulating intermediaries or conduct. The regime for “registered financial advisers (RFAs) is open to a variety of abuse…and there is some evidence of poor conduct by RFAs”.  New Zealand should “strengthen or remove the registration-only regime available now to intermediaries, introducing minimum requirements on competence and disclosure that apply to all advisers, including insurance brokers…”

New Zealand had already started on that journey.  The Financial Services Legislation Amendment Bill is currently before Parliament that will meet some of the IMF’s recommendations. The changes aim to align regulation with good business practice: building a trusted relationship with clients; giving advice that helps clients better understand risk; making sure that advice makes the client better off.   Changes are likely to take effect during 2019, but you should start to plan now. 

Scope of the new regime for financial advice

As the IMF observed, “almost all (and all significant) intermediaries are captured by the relatively wide definition of advice in the Financial Advisers Act, which includes simply giving an opinion on a financial product.”  The bill currently before Parliament will repeal the Financial Advisers Act and will move the regulation of financial advice to the Financial Markets Conduct Act 2013 (FMC Act).  The wide definition of “financial advice” will remain.  You will be caught by the new regime if you provide a recommendation or opinion about acquiring or disposing of (or not acquiring or disposing of) a financial advice product, such as an insurance policy. Financial advice can be provided by a business acting through employees, agents or computers (“robo-advice”).

Certain occupations (such as teachers and journalists) are excluded.  There is also an exclusion for any financial advice that is given as an ancillary part of a business “the principal activity of which is not the provision of a financial service”.  Certain activities will not amount to “financial advice”, such as: providing factual information, recommending a type of financial advice product (for example, “it is sensible to consider business interruption insurance”); recommending that a person obtain financial advice or passing on financial advice.  There is also a new exclusion for “execution only” business. 

The Financial Markets Authority (FMA) will have discretion in the application of the new regime, including the power to:

• Declare a person (or class of person) who would otherwise be a wholesale client to be a retail client;
   
• Declare advice to be, or to not be, financial advice; and
   
• Remove an exemption from a licensing requirement.

This highlights the importance of developing a good relationship with the FMA as regulator. Technically it will be possible to sell insurance without “financial advice”, but in practice, the circumstances where insurance can be sold without advice will be very limited. Under the new regime, there will be no distinction between “class” and “personalised” advice.  This means that you may have to become licensed even to publish an advertisement about a product, as if the advertisement includes a recommendation or opinion it will be “financial advice”.  

Wholesale clients

A licence is not required if the financial advice service is not provided to any retail clients. However, it is not possible to avoid the new regime by only dealing with other businesses. Other aspects of the regime will apply to wholesale clients, including the requirement to meet the duties to:

• Give priority to the client’s interests;
   
• Exercise care, diligence and skill;
   
• Disclose information, which may include levels of commission. The regulations to set disclosure requirements are being developed and an exposure draft should be released shortly.

The FMC Act defines “wholesale clients” to include investment businesses, Government agencies and persons who are “large”, which means: 

• As at the last day of each of the two most recently completed financial years of the person before the relevant time, the net assets of the person and the entities controlled by the person exceeded $5 million; or
   
• In each of the two most recently completed financial years of the person before the relevant time, the total consolidated turnover of the person and the entities controlled by the person exceeded $5 million.

Any service your business offers must comply with the regime for retail clients if any client does not meet the definition of a “wholesale client”. This could happen if you have a client who does not hold adequate net assets or turnover.  Clients can also opt out of being a “wholesale client” by providing you with a signed notice to that effect.  If you decide to limit your business to service wholesale clients, you must ensure that your clients continue to meet these requirements. 

Retail clients

Anyone providing advice about insurance to retail clients must be covered by a licence. To obtain a licence, your business will need to have adequate IT systems, competent people and proper processes. The FMA will require that your business meets minimum standards, so the main variables you can control are cost and time.   This means you should start planning now to minimise cost.

When providing advice to retail clients you must meet the same duties as for wholesale clients: giving priority to the clients’ interests, acting with care, diligence and skill and making appropriate disclosure. There are additional duties that apply when advising retail clients, including that you must:

• Provide advice only where competent to do so, and be subject to a code of conduct that sets minimum standards of competence, knowledge, skill, ethical behaviour, and client care; and
   
• Ensure that clients understand any limitations on the nature and scope of the advice provided (for example, how many products or how many providers have been considered).

What next?

The intermediated nature of insurance distribution brings innovation and flexibility, enabling businesses and clients to identify risks and obtain appropriate insurance cover. Globally, regulators struggle to regulate advice about insurance or other financial products.  Banning commission in the UK led to an “advice gap” where customers could not access advice.  In Australia, numerous Senate inquires have brought waves of regulatory reform to the industry.  

The proposals in the bill before Parliament were developed in line with international best practice and have already been subject to a lengthy consultation process.  It is likely that the bill will be passed substantially in the current form.  The detail of the new regime for disclosure, licensing and code of conduct are all in the process of being developed.  However, with a view to international best practice and FMA licensing, it is possible to anticipate how those requirements will develop.  There is a clear direction ahead for the regulation of
financial advice.