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Controversial and coming soon, but how broad is COFI’s reach?

30 Jun, 6:35am by Jenni McManus

An estimated 90% of businesses registered on the Financial Providers Services Register (FSPR) will not be expressly subject to the COFI regime, according to law firm Bell Gully.

And there is a risk that the Financial Markets (Conduct of Institutions) Amendment Bill may create an uneven regulatory playing field, it says. “Some institutions will be subject to a wide-ranging conduct and licensing regime while others providing the same service will not.”

Bell Gully says there is considerable overlap of COFI’s fair conduct principles and duties with existing conduct requirements in the Credit Contracts and Consumer Finance Act, FSLAA (the Financial Services Legislation Amendment Act) and the Financial Markets Conduct Act (FMCA).

For example, the CCCFA requires lenders to exercise care, diligence and skill and to treat borrowers reasonably and fairly. FSLAA has a series of similarly worded conduct obligations for those giving regulated financial advice. And the FMCA requires the care, diligence and skill of a prudent person.

Bell Gully says COFI’s statutory duties are broad enough to cover the obligations in each of the other three pieces of legislation and this could lead to uncertainty about scope.  It also notes that COFI does not address the prospect of conflict between these obligations.

Banks, non-bank deposit takers and insurers are already required to register with the Reserve Bank and are subject to its prudential supervision. So, it is “unnecessarily complex” to also require them to obtain a market services licence under Part 6 of the FMCA, Bell Gully said.

COFI is awaiting its third reading in the House, after a Supplementary Order Paper (SOP) was released about 10 days ago which confirmed changes to the Bill that had already been flagged in an earlier Cabinet paper.

The market is also waiting for regulations which Commerce and Consumer Affairs Minister David Clark says will cover incentives paid to advisers and other intermediaries who distribute the products and services of licensed insurers and banks. These too were flagged in the Cabinet paper and are expected to include a ban on incentives based on value and volume – a huge area of controversy in the sector.

The market had also been waiting for a statutory definition of an intermediary. This was given in the SOP, along with confirmation that insurers and other financial institutions would not be responsible for monitoring, training and supervising the conduct of intermediaries, many of which are independent third-party businesses.

Feedback given to the government was that making intermediaries responsible for implementing an insurer’s fair conduct program could have unintended consequences. Intermediaries, it was feared, might then restrict the number of insurers they worked with to limit the number of conduct regimes with which they had to comply.

But while the government might have backed down on this point, intermediaries and agents may still be subject to regulations requiring them to support the institution’s compliance with fair conduct principles.

The SOP narrows the definition of intermediaries to those who are paid a commission or some other consideration for providing a service or associated product. It does not include those who do preparatory or administrative work. The focus is on the person who arranges the contract for the service or acquires the product or gives financial advice. “Arrange” will be defined broadly, the government says, and will include negotiating, soliciting or procuring the contract.

However, employees (rather than agents and intermediaries) must undergo initial and regular ongoing training.

As expected, the SOP adds “vulnerable” consumers to the list of customers financial institutions must consider when determining whether their conduct is fair, and institutions must also consider an intermediary’s legal obligations – for example, if an intermediary is a financial advice provider, Part 6 of the FMA Act sets out the requirements about the quality of financial advice.

The most recent iteration of COFI removes the need for institutions to give the FMA a copy of their fair conduct programs. But they must be made available to consumers on request, and within a reasonable timeframe.

In its submissions to the Finance & Expenditure select committee when the COFI bill was first mooted, Bell Gully raised strong objections to this move. Much of the material in fair conduct programs, it said, will be “complex, engage legitimate privacy concerns or otherwise be unsuitable for public consumption”.

Rather than being a single document, the program was like to include internal policies, compliance systems and testing, remuneration policies, key performance indicators, internal audit work and job descriptions of key staff.

“Regardless of the form in which it is published, we don’t think such information would be helpful to customers,” the firm said.

On Clark’s insistence that further regulation is needed to control commissions and other incentives, those in the sector say the days of conferences in exotic locations and plus overseas trips are long gone. Despite the minister’s fears, nobody is now paid on a volume basis, they say.

“Insurers treat everybody the same, regardless of whether they’re super-stars or not,” one adviser said. “They provide other things for the super-stars, like better services and bits and pieces like that, but they pay all of us the same, whether we write one [policy] or 20.”

But without meaningful incentives, it was hard to see how the industry could move forward he said. “It doesn’t work to have everyone on $200k a year and selling no insurance.”

Financial Advice NZ made a similar point in its submissions to the Finance and Expenditure committee. It opposed the idea of new powers to regulate sales incentives, saying there was no evidence of any harm or systemic failure in the way these were delivered.

Any attempt to use regulation to determine commercial arrangements and financial advisers’ remuneration could have “a devastating effect across the sector if there was no adequate oversight”, Financial Advice NZ said.

“To allocate these powers to regulation and licensing, we believe, is dangerous and could destroy the advice sector and New Zealanders’ access to financial advice and increase the massive under-insurance which currently exists.”

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