The Government has announced a new regime to regulate financial conduct, which it says will make banks and insurers treat their customers fairly.
Commerce and Consumer Affairs Minister, Kris Faafoi, says the move intends to ensure the fairer treatment of consumers from banks, insurers and other financial service providers.
“Under this new regime we are aiming to ban things like target-based sales incentives, which put profits ahead of people, as has been identified in recent reviews,” Faafoi said.
“Those reviews by the Reserve Bank of New Zealand and the Financial Markets Authority (FMA) have also highlighted other problems in the banking and insurance sectors, which include weak systems for managing conduct risks and ensuring good conduct is a priority in their business,” he added.
Faafoi said new legislation will soon be introduced to Parliament which will require banks, insurers and other financial service providers to put systems in place to ensure the fair treatment of their customers.
The measures the Government is introducing include:
- A new conduct licensing system for banks, insurers and non-bank deposit takers such as credit unions
- The new regime requiring these entities to meet high standards of customer treatment
- A ban on incentives which are based on meeting sales targets (e.g. soft commissions such as overseas trips, bonuses for selling a certain number of financial products, leader boards, and performance management based on the volume of sales).
The Government said this prohibition of sales incentives will apply to banks, insurers, non bank deposit takers and their intermediaries.
“Incentives such as overseas trips or bonuses for selling a certain amount of insurance policies can lead to sales staff pressuring customers into buying unsuitable products, like policies they can never claim on,” explained Faafoi.
“Removing these types of incentives will provide better protections for consumers from misconduct.”
More Power to FMA
The Government confirmed the new regime will be backed by strong enforcement tools, including giving the FMA the ability to direct licensed institutions to change behaviour, improve their systems and processes, as well as suspend or vary the conditions of a licence.
Financial institutions will also face strong financial penalties for breaching their obligations under the regime.
“By taking action to improve conduct, we’re putting the consumer at the centre and helping banks and insurers to restore confidence in their industry. We all benefit from a well-functioning financial sector that’s focussed on the interests and needs of customers,” Faafoi said.
The FMA has welcomed the Government’s announcement and Chief Executive, Rob Everett, said the FMA and Reserve Bank had highlighted gaps in the regulation of banks and insurance in their joint thematic reports on conduct and culture in both sectors.
“The Government has said today it intends to close these gaps and give us the mandate to implement and enforce conduct obligations across both sectors,” said Everett.
“We look forward to working with industry to implement any changes passed by Parliament to ensure banks and insurance companies serve the needs of their customers.”
A Win for Consumers
Also responding to the announcement, Financial Advice New Zealand says consumers are the big winners from the new financial conduct regime.
Financial Advice New Zealand Chief Executive, Katrina Shanks, says creating a licensing regime for banks, insurers, and non-bank deposit-takers is a good move.
“The aim of the Code of Professional Conduct for Financial Advice Services, due to be implemented next year, is to make sure customers are treated fairly. Aligning financial institutions to a similar standard should ensure a consistent approach for the life cycle of a product, from design to claim,” Shanks said.
“We agree in principle with the creation of obligations for financial institutions around how they design their remuneration and any sales incentives, and how they manage the risks those incentives create,” she said.
“All stakeholders must ensure people can access quality advice and that includes a remuneration system that allows a range of sustainable financial advice business models.”
Shanks said the removal of sales targets and incentives is a good idea because of the risk in sending incorrect messaging to those providing advice and that the association is interested in seeing more detail regarding this.
“We do, however, disagree with the example given to support the claim that incentives can lead to sales staff pressuring customers into buying unsuitable products, such as policies they can never claim on. The example given is an extreme one which we would not consider to be representative of the practices of 99.9% of financial advisers,” she said.
“We are all focused on good consumer outcomes, and that means good accessibility for the public to financial advisers. This announcement endorses the importance of financial advisers and the sustainability of their future.”
“This announcement endorses the importance of financial advisers and the sustainability of their future.”
The Financial Services Council CEO, Richard Klipin, says, “The scope of the measures released today is comprehensive and aligns closely with our industry-led work.”
He said the proposals will help to build public confidence in the financial services sector.
“The focus of the new regime on licensing, expanding the FMA’s remit, and ensuring remuneration practices serve good and fair client outcomes is entirely appropriate,” said Klipin.
“We now need to see the detail behind the proposals and we look forward to working closely with the Government on this and the eventual implementation of the new regime.”