The Government’s legislative response to the review of conduct and culture in financial institutions, the Financial Markets (Conduct of Institutions) Amendment Bill, reported back from the Finance and Expenditure Select Committee last week.
The Bill will require banks, insurers, and non-bank deposit takers to be licensed by the Financial Markets Authority, and be held to a high level fair treatment standard. The original Bill was largely consistent with the policy announcements made in September 2019 (see our earlier commentary here and here).
The Select Committee has recommended a range of changes to the Bill. The changes make the Bill much more workable than originally proposed, without changing the fundamental nature of the regime (fund managers remain out of scope, for example).
This article summarises the main changes.
Simplifying the rules for intermediaries
Intermediaries will no longer need to comply with financial institutions’ fair conduct programmes (and financial institutions won’t have to ensure they do). Instead, a financial institution’s fair conduct programme will need to cover the training and supervision of intermediaries.
This is a major win. The need for intermediaries to comply with one – or more – different fair conduct programmes and the corresponding duty on financial institutions was one of the biggest issues with the initial Bill. Removing this requirement also streamlines the Bill, because it removes the need for different (and quite complicated) rules around intermediaries that are also financial institutions or financial advice providers.
The training and supervision requirements appear sensible at first glance, but they are comprehensive. Most financial institutions already do good work in this area, but more is likely to be required, particularly in terms of supervision.
There is one potential fishhook. The fair conduct principle applies to financial institutions when they use intermediaries, and fair conduct programmes must require intermediaries to follow procedures or processes that are necessary or desirable to support compliance with the fair conduct principle. Clarity on this point is needed – and in particular as to whether it goes beyond training and supervision.
Clarifying the fair conduct principle
The Bill now provides a non-exhaustive list of what it means to treat consumers fairly. It includes:
- paying due regard to consumers’ interests (this was previously the only example given)
- acting ethically, transparently, and in good faith
- helping consumers to make informed decisions
- ensuring services and products are likely to meet target consumers’ requirements and objectives
- not subjecting consumers to unfair pressure, tactics or influence.
We think that this a positive change that should be welcomed by financial institutions. The requirement is still broad and subjective, and there will inevitably be ongoing debate about exactly what the various components mean. However, the added detail should help guide financial institutions towards a more universal application of the principle.
Expanded minimum requirements for fair conduct programmes
Fair conduct programmes sit at the heart of the regime. The minimum requirements for fair conduct programmes have been significantly expanded by the Select Committee.
The changes provide much needed guidance on what fair conduct programmes need to cover, add some certainty, and provide a better basis for regulations to expand upon. The proposed requirements now also include having effective policies, processes, systems, and controls for:
- designing and managing services and products (including regular reviews)
- identifying, monitoring, and managing conduct risks (the Bill provides further detail on what this means)
- identifying conduct that doesn’t meet the fair conduct principle and taking reasonable steps to mitigate any adverse effects (i.e., to remediating consumers)
- training and supervising employees, agents, and intermediaries
- designing and managing incentives that mitigate or avoid the adverse effects of incentives
- communicating with consumers (and doing so in a clear, concise, and effective manner).
In addition, a new section makes it clear that whether a fair conduct programme is effective will depend on a range of factors, including the nature, size, and complexity of the financial institution, the products and services it offers, and the types of consumers it deals with. This is a good news / bad news story. It should provide some comfort for smaller financial institutions like credit unions and other non-bank deposit takers, but equally we see it as a clear signal that a lot is expected of large banks and insurers.
Fair conduct programmes not to be publicly available
The proposed requirement to make fair conduct programmes publicly available has been removed. Instead, financial institutions will need to provide their full fair conduct programmes to the FMA, and make a summary publicly available. The summary will need to include enough detail to allow consumers to be reasonably aware of how the financial institution will comply with the fair conduct principle, make informed decisions about dealing with the financial institution, and understand how to complain. Regulations will be able to supplement these requirements.
This change is likely to have almost universal support, and I’m strongly in favour of removing the need to publish the full programme. However, I’m not convinced on the merits of a publicly available summary. It is a compromise between full disclosure and no disclosure, but could result in fairly standardised disclosures. Alternatively, financial institutions could spend significant time and resource developing summaries that consumers never read.
Some clarification of the incentives rules
The proposed provisions that enable regulations to ban incentives have been almost universally criticised as far too broad. Unfortunately, they haven’t really changed.
A new section has been added to clarify that regulations can only limit incentives in the distribution chain for the relevant products and services, which had always been the clear intention.
A new section has also been added to require the Minister to have regard to a range of factors before recommending regulations. This includes factors like whether the regulations are likely to mitigate the adverse effects of incentives, but also industry factors like the effect of regulations on the financial services industry and the availability of advice.
The Minister must also be satisfied that the proposed regulations should not be more appropriately dealt with by a change of law. This is better than the position in the initial Bill, but I’d still prefer the Bill to be limited to only those regulations the Government has said it wants to limit.
Commencement and review
The Select Committee has extended the long stop implementation date from two years to three years, with a transitional period of up to two years after that. Together these changes mean slightly more time for industry to prepare.
A five year review has also been added to the Bill. This is similar to the review provision included in the Financial Advisers Act 2008. We support this as it will provide a specific opportunity for issues that arise after commencement to be considered.
While the Bill is a significant improvement, it still isn’t perfect. There are some minor points of technical detail that we are surprised haven’t been corrected, such as clarifying the position of subsidiaries of financial institutions. The Bill still also defers more to regulations than we would like, and has areas of uncertainty that may ultimately only be clarified by the Court.
The pending election means there will be a delay before the Bill gets its second reading, and the timing from here will largely be driven by the next Government’s priorities. In the meantime, we understand Officials are beginning to think about the detailed regulations needed to support the Bill.
Get in touch!
Anthony Harper has extensive experience in conduct and culture issues, and are actively supporting clients across the financial services sector on these issues. We also regularly assist clients across all sectors with law reform issues. If you have any questions, or need assistance in your business, please get in touch: email@example.com | 09 984 4234 | 021 242 7686.
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