Thursday 11th December 2014
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The Financial Markets Authority has seen an increasing number of complaints regarding insurance sales and is undertaking more work to assess the size of the mis-selling problem.
Ensuring sales and advisory services meet the best interests of investors and consumers is one of seven key priorities the FMA identified in its first medium term risk outlook published today.
The seven areas follow a wide ranging analysis of the sectors it regulates to identify the areas most likely to cause concern and are where it will focus most of its regulatory effort in the next two to three years.
The other six areas include company governance and culture, firms and professionals managing conflicts of interest effectively, facilitating capital market growth while maintaining integrity, giving investors access to tools that help them make more informed financial decisions, ensuring frontline regulators such as trustees and the NZX are doing their job, and maximising the FMA’s own effectiveness and efficiency as a regulator.
FMA chief executive Rob Everett said the strategic risks partly reflect the FMA’s expanded mandate under the Financial Markets Conduct Act, which has taken effect progressively this year. Both its workload and annual budget has increased and Everett said choices had to be made about where it focuses its efforts in order to get the best results.
“The FMA’s overarching objective is to promote and facilitate fair, efficient and transparent financial markets. Defining the risks that pose the most significant barriers to us achieving our main objectives means we can focus our resources strategically.”
More than 11,000 firms, professionals, registered schemes, and funds are now under the FMA’s mandate. Under the second phase of Act which came into effect on Dec.1, several hundred businesses and professional who want to deliver financial services are expected to apply for licences over the next two years and it introduced a new fair-dealing provision that prohibits misleading or deceptive conduct. It also gave the FMA better tools to anticipate problems and act before they cause harm.
Among the greatest risks to consumers and investors having confidence in the market identified by the FMA include mixed quality in financial advice, from authorised financial advisers and others. Adviser competence, conflicts of interest, poor culture and conduct, and gaps in investor understanding can all lead to unacceptable sales and advice services and poor investor outcomes, it said. A specific area of focus under this leg includes mis-selling of financial products, in particular, insurance and KiwiSaver.
The FMA said it will prioritise reports of misconduct by Registered Financial Advisers (RFAs), particularly in relation to insurance mis-selling. RFAs are unauthorised financial advisers who can give advice on simple financial products such as insurance contracts, some life insurance policies, and bank term deposits.
In relation to authorised financial advisers, the FMA sees risks for conflicted conduct around poor culture and misaligned incentive arrangements such as upfront and trail commissions that can lead to financial product mis-selling and the design and sale of products that disadvantage consumers. It can also lead to poor quality disclosure, especially about fees and risks, the FMA said.
Under the priority relating to governance the risks identified include directors’ skills and competencies in ensuring firms meet regulatory obligations. Significant risks may arise where boards fail to lead from the top, or where they simply apply a ‘set and forget’ approach. Instead, boards have a responsibility to continuously assess culture and conduct against both organisation and customer outcomes, the FMA said.
It's not the only one concerned about corporate governance. The NZ Superannuation Fund has helped set up an informal forum of institutional investors to push for better corporate governance as a group rather than individually. Super Fund chief executive Adrian Orr said as a long term and active owner, it had a long term interest in the governance of the companies it invests in.
"We are particularly interested in understanding board strategy and issues that improve board decision making, for example diversity, transparency and independence. For these reasons we are working alongside other Crown financial institutions to champion best practice corporate governance standards in New Zealand. Corporate governance is also a focus of our global responsible investment programme.”
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