Financial Markets (Conduct of Institutions) Amendment Bill

on behalf of the Minister of Commerce and Consumer Affairs: I present to the House a legislative statement on the Financial Markets (Conduct of Institutions) Amendment Bill.

ASSISTANT SPEAKER (Hon Jacqui Dean): That legislative statement is published under the authority of the House and can be found on the Parliament website.

I move, That the Financial Markets (Conduct of Institutions) Amendment Bill be now read a second time.

I’d like to acknowledge my colleagues the Hon Kris Faafoi and the Hon Dr David Clark for their work in guiding this bill thus far. The bill has been reported back by the Finance and Expenditure Committee (FEC) with a majority recommendation that it be passed with amendment. I would like to express my appreciation to the members of the committee in the last term of Parliament for their careful consideration of the bill. The committee considered 59 submissions from industry groups and individuals covering a range of matters, and I’d like to thank those who spent time and effort in preparing their submission to the select committee. The majority of those submitters supported the policy intent of the bill, but the committee has recommended some important changes aimed at ensuring that the bill achieves its policy intent.

Before I go into the changes that the FEC recommended to the bill, I want to take a step back as to why we are here today. The purpose of this bill is to improve the conduct of financial institutions so that consumers are fairly treated. If consumers are treated fairly, this will help build trust and confidence in our financial sector. Financial institutions like banks and insurers are crucial to New Zealanders’ everyday lives, whether it’s things like saving for a rainy day, getting a mortgage, or getting insurance for your car. Financial products and services are typically complex and often high value, and there is often an imbalance of power between the financial institution and the customers they serve. This creates a particular and acute risk of harm to customers. When things go wrong with financial products or services, it can be catastrophic at the individual level and cause significant harm at the broader societal and economic level. It is vital that New Zealanders can trust these institutions.

In particular, during times when New Zealanders are feeling the financial impacts of COVID-19, this piece of legislation is important to ensure that banks, insurers, and non-bank deposit takers are serving the needs and interests of their customers. The bill fills a gap that exists in New Zealand’s current law in that there is currently no explicit law to regulate the general conduct of financial institutions. There have been several recent reviews that have highlighted this gap, including the reviews undertaken by the Financial Markets Authority and the Reserve Bank of New Zealand into the conduct and culture of banks and insurers. These reviews showed that there are weaknesses in the conduct and culture of institutions in New Zealand’s financial sector, particularly in respect of the governance and management of conduct risks and ensuring a focus of good customer outcomes. These weaknesses risk eroding customers’ trust in financial institutions, and it is therefore vital that we fix the gap in the law. The bill fixes this gap by establishing a new regulatory regime for the conduct of financial institutions.

I will now cover some key aspects of the bill and the work of the select committee on the bill. Fairness is essential to building trust in the financial sector, which is why the bill introduces a fair conduct principle—that is, for financial institutions to treat their customers fairly. The fair conduct principle lies at the heart of the bill. Some submitters requested further clarification of what it means to treat customers fairly. In response, the committee recommended inserting a non-exhaustive list of factors into the bill of what treating customers fairly can mean, and this includes “acting ethically, transparently, and in good faith; … assisting consumers to make informed decisions; and … not subjecting consumers to unfair pressure or tactics or undue influence.”

In order for the fair conduct principle to be operationalised, the bill requires financial institutions to have and maintain an effective fair conduct programme to turn the principle to concrete actions within their businesses. The conduct programme will require financial institutions to have policies, processes, systems, and controls in place that are designed to ensure they’re considering consumers’ interests and treating them fairly in all respects of their business and in their interactions with consumers. The select committee has recommended that minimum requirements for fair conduct programmes be clarified and included in the bill. This is in response to submitters’ feedback that leaving the detail of conduct programmes to regulations would leave the regime uncertain.

Incentives offered by financial institutions to their front-line sales staff or through their intermediaries can create conflicts between the interests of those who are selling or advising on products and services and the interests of consumers. These conflicts can cause sellers or advisers to prioritise their own interests over the interests of their customers in the pursuit of a reward, and this means that products or services can be mis-sold to—

💬 SPEAKER: Order! Order! I just interrupt the member. I know this is not the main event for most people who are in the galleries, but there is still a requirement to be silent while you’re in the galleries, not murmurs of anticipation.

Thank you, Mr Speaker. This means that products and services can be mis-sold to consumers. The first way the bill deals with risks associated with incentives is through the fair conduct programmes. There is an obligation on financial institutions to have effective processes for designing and managing the adverse effects of incentives on the interests of consumers. This will ensure that financial institutions are turning their mind to the risks that these incentives pose to good consumer outcomes and mitigating any adverse effects on consumers’ interests.

The second way the bill deals with incentives is via the creation of a regulation-making power which allows for the prohibition or regulation of particular incentives and practices. Cabinet has already agreed to prohibit incentives based on value or volume targets. I’d like to take a moment here to provide an example of what we mean by value- or volume-based sales targets and the potential harm of them. Say an adviser will receive a thousand-dollar bonus for selling 10 insurance policies. The conflict of interest for the adviser to sell an insurance policy at the start may well be very low. However, at the point where the adviser has sold nine policies and only needs one more to get the thousand-dollar bonus, the conflict of interest between the adviser and the consumer is high. At the point of sale, the adviser has their own interests to consider as well as the consumer’s. This conflict can lead to harm such as consumers having less favourable policy terms than before or consumers being sold products they didn’t need. People are still able to be remunerated for sales and advice. However, these two constraints will address particularly problematic, conflicted remuneration and ensure that risks to consumers are mitigated.

Some concerns were raised in select committee that this regulation-making power was too broad and could be used to ban all incentives or commissions. In response, the committee has recommended narrowing the range of intermediaries to which the incentive regulation-making power can apply and inserting a list of matters that the Minister must have regard to or be satisfied of before recommending regulations under this power.

Another concern raised at select committee was how the framework of the bill works in relation to the intermediaries of financial institutions. The committee recommended that intermediaries’ obligations in the bill be reduced by removing the duty for intermediaries to comply with financial institutions’ fair conduct programmes and removing the duty on financial institutions to ensure that intermediaries comply with their programme. The change will help to ensure that the new regime is not placing unnecessary compliance costs on intermediaries while also requiring financial institutions to take greater responsibility for customer outcomes regardless of the sales channel. The Ministry of Business, Innovation and Employment is currently publicly consulting on the intermediary provisions in the bill to ensure that the intermediaries’ obligations are right-sized and will work in practice.

In closing, I would like to thank the Finance and Expenditure Committee again for their careful consideration of the bill. This bill will ensure that customer rights are at the forefront of financial institutions’ activities and they are treated fairly. This will serve the interests of everyday consumers, help to build trust in the sector, and lift wellbeing across the board. I commend the bill to the House.

The question is that the motion be agreed to. I’m going to call Nicola Willis for a very short time.

National opposes this bill. Yes, financial institutions, banks, insurers, and the like should have controls in place to ensure they are focused on the best interests of their customers, but this bill risks imposing a compliance-heavy, box-ticking exercise.

Mr Speaker, may I seek your indulgence to acknowledge my colleague the Hon Dr Nick Smith whose 30 years in this House have had a profound impact on the governance of our country. I first worked for Nick in 2003. He has been a source of wisdom and advice to me ever since, and I will miss him from this House. Farewell friend.