Simple, streamlined regulation the golden prize

The prize to be achieved from simplifying and standardising financial services regulation is significant, law firm MinterEllisonRuddWatts says.

The comments come after Commerce and Consumers Affairs Minister Andrew Bayly this week said he was prioritising work on changes to the Credit Contracts and Consumer Finance Act (CCCFA) and Conduct of Financial Institutions (CoFI) legislation.

As part of the work Bayly will be transferring regulatory functions, so the RBNZ becomes the prudential regulator and the FMA the conduct regulator.

The FMA will issue a single licence covering conduct issues for financial institutions, while also clearly defining obligations within the Financial Markets Conduct Act, meaning easier reference for growing or contracting financial institutions.

And duplication will be removed in areas of initial fit-and-proper person assessments required by both the FMA and RBNZ but both entities to report separately on cyber resilience.

He says his concern about because a large financial institution may need to apply for up to five licences from the FMA because of legislative and regulatory changes made over successive governments, which led to the architecture of the financial services sector losing some of its coherence and clarity.

CoFI in its current form is an example. “It introduces another licence requirement and imposes substantial compliance costs which are not proportionate to the issues the legislation intends to address, Bayly says.

MinterEllisonRuddWatts previously criticised the country’s regulatory architecture saying it has increasingly strayed away from its intended ‘twin peaks’ model to a crossover of mandates between the three regulators – the RBNZ, FMA and Commerce Commission. “The upshot was a confusing regulatory landscape, overlapping guidance and a multiple-licence system for financial institutions.”

The law firm agreed with Bayly in saying this created significant operational burdens counterproductive to Kiwis and their businesses.

“The financial services sector represents a significant part of the New Zealand economy, and should be a large contributor to economic growth,” the law firm says. “However, achieving such growth is dependent upon a regulatory structure which promotes innovation and flexibility in financial markets, avoids unnecessary compliance costs, and facilitates the development of fair, efficient and transparent financial markets.”

FMA prepares for regulatory changes

The FMA says it wants to change this. Chief executive Samantha Barrass says using the core principals at the heart of CoFI can result in a simple and streamlined approach for conduct regulation across the piece.

“The fair conduct principle that sits at the heart of CoFI, that a ‘financial institution must treat consumers fairly’ sets out that the fundamental components of fair conduct are:

  • paying due regard to a consumers interests;
  • acting ethically, transparently and in good faith;
  • assisting customers to make informed decisions;
  • ensuring relevant services and associated products meet the requirements and objectives of likely consumers; and
  • not subjecting consumers to unfair pressure or tactics or undue influence. 

Barrass says taking this approach to the conduct of all financial services means that an outcomes-based regime can provide flexibility, support innovation and avoid box ticking. “It promotes a supervisory relationship that facilitates proactive and proportionate engagement. It also enables us to minimise regulatory burden.” 

She says additional guidance and engagement will be provided for small firms to ensure they have everything they need to be successful.

“It obviously costs more of our resources but makes things less costly and more straightforward for firms. We will be working with both the Government and the sector to do this.”

Responsibility not scrutiny 

She took exception to feedback from some in the sector who believe the FMA will be subjecting firms’ fair conduct programmes to significant scrutiny during the licensing process.

“I want to be clear that this has never been our intention and has never been a part of our planning. It’s not for us to go through your fair conduct programme line by line. We’re not going to be signing them off.  The responsibility for these programmes sits with the board of the institutions.

“It is for you to right-size your fair conduct programme or your CoFI application for your business, especially for smaller firms.” 

The FMA, Barrass says, will be flexible and respond to different business models throughout the licensing process and in its supervision and monitoring approach. “The FMA has never had a one size fits all approach to its work, taking an approach based on engagement and working with the sector.“

She says aligning credit regulation with an outcomes-based approach and fair conduct rules will provide clear and constructive benefits. “It will provide regulatory certainty and efficiency. It will help ease burden while ensuring a range of monitoring, supervisory and enforcement tools to manage poor conduct in the sector. It will also allow expectations to evolve as new technologies, products and business models emerge.” 

Bad practices

Pointing to more prescriptive approaches to regulation, Barrass says the risk of ‘tick box’ regulation is real.

“It contributes to regulators failing to spot emerging risk, despite their cross-sector vantage point. It increases the extent to which regulation can cut across innovation, including changes that improve outcomes for consumers, markets and society. Unfortunately it allows some to design technical compliance models that fail to achieve the consumer and market aims of the regulatory model.”

Rules and other regulations are of course a critical part of the framework. These outcomes don’t replace our legislation – they are not new rules, she says.  

“We don’t need to go back too far to recognise the market failures that have cut across consumer outcomes and clean markets. Just a cursory look at the enforcement action we have taken in the past year, demonstrates the risk posed by those who can’t or won’t deliver fair consumer outcomes or support clean markets.” 

Barrass says the FMA made it clear last year that it is alert to any practices by providers that lead to high pressure sales, not just commissions, not just sales-based remuneration.  It acted following a review of the classification of wholesale customers. She says these are good examples of the FMA beginning to consider how outcomes-focused regulation will work in practice. We weren’t simply focused on a narrow range of practices. We were looking at risks to the outcome that ‘consumers can trust providers to act in their interests, she says. 

To prepare for regulatory changes, the FMA will be looking into pilot approaches in the coming year with a small number of firms, and invited industry members to help inform the FMA’s approach.

Barrass says industry engagement with the FMA’s monitoring teams will facilitate “a palpable shift to outcomes rather than rules and compliance with rules.”

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