Financial services - Looking ahead to 2019
Legal reform and the financial services sector go hand-in-hand, with almost constant regulatory change the norm. Looking ahead to 2019, there are two developments which will need particular attention – good conduct, and changes to financial advice laws.
An increasing focus on conduct
Good conduct in financial services is an emerging issue globally. It's been increasingly relevant locally, with the Financial Markets Authority publishing a guide to its view of conduct in February 2017, but has really come to the forefront as a result of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The Royal Commission has identified quite damning examples of poor conduct, and the Australian financial services industry (and its regulators) have serious work to do to restore public confidence.
As a direct response to the Royal Commission, FMA and the Reserve Bank of New Zealand investigated conduct in New Zealand's banks and large insurers. The report on banks was released in early November. Although widespread misconduct or poor culture wasn't found, the regulators identified issues that need to be addressed.
FMA and RBNZ made a number of recommendations for change. The most significant is that banks should remove incentives linked to sales for salespeople and their managers, and revise incentive structures through all layers of management. Banks have been given until the end of March to commit to doing so, or to show how their controls are strong enough to address the risks of poor conduct. The very clear steer is that these incentives need to go.
The report also identified gaps in conduct regulation. Ultimately, we think FMA will be given more power to oversee the conduct of banks. There is talk of establishing basic legal duties for banks to protect or enhance customer interests and outcomes.
The equivalent report on life insurers is due in January, and will make for interesting reading. We're particularly interested to see what recommendations are made around incentives for the sale of insurance, where the issues are much more complicated.
Good conduct is an issue for all financial service providers, and not just those at the big end of town. We're seeing increasing interest from clients on how to address conduct and culture, and we expect that to continue into 2019.
Increasing momentum on financial advice reforms
New Zealand's financial advice laws are complicated. They contain arbitrary distinctions about how different types of products and advice are regulated, and who is able to give advice in different circumstances. The rules have also hampered robo-advice (an issue now partially addressed by an FMA exemption).
The Financial Services Legislation Amendment Bill will bring new financial advice rules into the Financial Markets Conduct Act 2013. The changes mean that:
financial advice will only be able to be given to retail clients by or on behalf of a licensed provider – but will be able to be given directly (including through robo-advice), or through financial advisers or nominated representative
enhanced duties will apply to all financial advice, including a statutory obligation to give priority to a client's interests
all financial advice given to retail clients will be subject to a Code of Conduct setting out minimum standards of ethical behaviour and client care, competence, and knowledge and skill.
2018 saw the Bill approach final form, two rounds of public consultation on the draft Code of Conduct, and consultation on disclosure requirements. Looking ahead to 2019, we expect:
the Bill to become law, largely in the current form, in Q1
the Code of Conduct to be approved by the Minister in Q2
FMA to start accepting applications for transitional licences by the end of the year.
This timing would see the new regime start sometime in Q2 2020, following by a two year transition period.
These are fundamental changes. Everyone who gives financial advice will need to review their systems, processes, and practices. New documentation will be needed. For some, business models will need to change and for others the reforms will open new doors. Many providers are already planning for the change, and we're helping a number of them. Those who aren't working on it yet will need to start in the new year.