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Faafoi foreshadows conduct licensing regime for financial institutions

Wednesday 25th September 2019

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Individuals will face fines of up to $1 million dollars and companies up to $5 million for breaches of a planned new conduct licensing regime for financial services providers.

"We're sending a pretty clear message," says Commerce and Consumer Affairs Minister Kris Faafoi in announcing the new regime, which will be administered by the Financial Markets Authority.

Faafoi says he hasn't had the opportunity yet to have substantive discussions with the FMA about their new powers but "I'm sure they will have some feedback for us."

The FMA will be given "a full range of enforcement tools," including the ability to suspend or cancel licences.

The FMA will also require more resources which will be "not insignificant" and that will be decided through the normal budgetary process.

Faafoi says he hopes the legislation establishing the new regime will get its first reading in parliament before year's end and that, after going through the normal select committee process, it will be passed into law before next year's election.

Customers can expect fairer treatment under the new regime for financial services providers, he says.

"In the past, regulators haven't had any tools to prohibit issues around conduct and culture. This is new territory. This has not been done before," Faafoi told journalists.

"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 says.

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 IT and other systems and processes.

"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."

The new regime is one outcome of the Reserve Bank and FMA's joint review of both banks and life insurance companies.

Financial institutions will be required to implement "effective policies, processes, systems and controls to meet the fair treatment standard."

They also face obligations in relation to how they design their remuneration and any other sales incentives and how they manage the risks those incentives create.

Soft commissions, such as overseas trips and bonuses based on the volume of sales, will be prohibited.

The institutions will also be accountable for sales to consumers through third parties, such as retailers, car dealers and travel agents and/or airlines, who provide add-on finance and/or insurance.

"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," Faafoi says.

"Removing these types of incentives will provide better protections for consumers from misconduct."

The FMA has identified churn of life insurance policies as a major issue, estimating that only about 2 percent of new policies are actually new and the remainder is churning from one policy to another.

There's an obvious incentive for insurance salespeople to churn polices because they get paid upfront commissions on new policies.

The economic significance is far from small: there are about four million life insurance premiums in force with annual premiums totalling $2.57 billion.

The Reserve Bank has estimated that commissions to salespeople in New Zealand amount to about 25 percent of total premiums paid each year, far higher than in other countries – Mexico and Hungary are the next highest at about 15 percent with Australia at about 12 percent and the United States about 9 percent.

Faafoi says the new licensing regime should deal with commissions and incentives and "I hope as a result we will see the symptom of churn diminishing."


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