The year ahead looks set to bring significant legislative and regulatory change to the financial services sector, including a new financial advice regime, major changes for consumer lending, and significant changes for deposit takers.
Also on the horizon are a proposed conduct and culture regulatory regime, climate-related disclosures regime, updates to the Fair Trading Act, and a potential consumer data right.
Towards the end of 2020, the new Labour government publicly released the briefings given to its incoming Ministers from public sector agencies, crown entities and regulators. The briefings include papers prepared by the FMA, Commerce Commission, RBNZ and MBIE outlining the current state of financial services regulation and upcoming focus areas.
In this article, we summarise some key highlights from the briefings.
Start of the new financial advice regime
The new financial advice regime introduced by the Financial Services Legislation Amendment Act 2019 (FSLAA) starts on
15 March 2021. This regime requires anyone providing regulated financial advice to retail clients to operate under an appropriate financial advice licence granted by the FMA. Financial advisers must also comply with the Code of Professional Conduct for financial advice services, as well as new rules and regulations under the Financial Markets Conduct Act 2013 (FMCA). In its ministerial briefing, the FMA has said that its immediate aim is “to do what we can to ensure everyone providing a financial advice service is licensed in time, and to remove any regulatory uncertainty for this newly regulated population". The FMA's Annual Report published in December last year also noted that the financial advice regime is “still a huge priority" for the FMA in 2021 as it continues to oversee the transitional licensing period, design the full licensing regime, and work out how to monitor and supervise the financial advice sector.
Next steps for the conduct and culture regulation regime
The Financial Markets (Conduct of Institutions) Amendment Bill (COFI) is awaiting its second reading after the Finance and Expenditure Committee released its report in August 2020. COFI proposes a new conduct and culture regime for banks, insurers, non-bank deposit takers, and some intermediaries. For more detail on the regime and how financial service providers can best prepare, see:
The Big Picture: Financial Markets – Greater detail on the conduct regulation regime.
The FMA has flagged that it will be seeking additional funding to support the implementation and oversight of the new conduct regime, which would significantly expand its remit to cover conduct regulation of banks, insurers and non-bank deposit takers, and see its focus broaden from investors to consumers. The FMA is currently working closely with MBIE on developing the regulations needed to support the Bill.
Industry feedback on COFI has identified concern regarding the absence of prescriptive guidance on the requirements of the new conduct regime. It remains to be seen whether the parliamentary process addresses these concerns. In the meantime, the FMA has said that it plans to publish a refresh of its Guide to Good Conduct in Q1 2021.
A new financial markets infrastructures regime
The Financial Market Infrastructures Bill (FMI Bill) is also currently awaiting its second reading. The Bill seeks to establish a regulatory regime for financial market infrastructures or “FMIs", i.e. multilateral systems for clearing, settling, or recording payments, personal property, or other transactions within the financial system. This would replace the existing regime for payment systems and settlement systems in the Reserve Bank of New Zealand Act 1989, as well as extend regulation to central counterparties, central securities depositories, and trade repositories. The RBNZ and FMA would act as joint regulators.
A key proposal of the Bill is to distinguish between designated and non-designated FMIs. “Systemically important" FMIs, i.e. FMIs where disruptions to their systems would “threaten the stability of, or confidence in, the whole or a significant part of the financial system", would be “designated" by the Minister (on the recommendation of the regulators) for more intensive regulation than non-designated FMIs. The Bill also provides legal protections for designated FMIs, settlement systems and netting procedures. In respect of designated FMIs, it is proposed that the regulator be able to issue legally binding standards, review and require changes to contingency plans for operational or financial failure developed by the FMIs, and manage their disruption or failure.
For RBNZ, the FMI legislation and proposed Deposit Takers Act (see below) represents an overhaul of prudential regulation and supervision. RBNZ has identified that it will be focusing on “deposit insurance and failure management, and strengthening our capacity and capability in supervision and enforcement".
Reserve Bank of New Zealand reform progresses
Work is ongoing to replace the current Reserve Bank Act 1989 with a proposed Reserve Bank of New Zealand Act and a Deposit Takers Act.
The Reserve Bank of New Zealand Bill was introduced into Parliament last year. Public submissions to the Finance and Expenditure Committee recently closed. RBNZ expects the Bill to pass through its remaining stages to receive Royal Assent this year, becoming effective from
1 July 2022. This Bill provides a revised framework for the objectives, functions, management and governance of the Reserve Bank. In its ministerial briefing, RBNZ has noted that the passage and implementation of this Bill together with a new Funding Agreement, will facilitate “considerable transformation of the Bank".
RBNZ is also working with Treasury to progress the Deposit Takers Act. Consultation closed in October 2020 and it is anticipated that Cabinet will make final policy decisions in early Q2 2021, with legislative drafting to follow. The Deposit Takers Act is expected to combine the regulation of banks and non-bank deposit takers under the same overall regime by:
providing the Reserve Bank, as the regulator, with new supervision and enforcement tools,
imposing statutory accountability duties upon directors, and
introducing crisis management mechanisms to protect vulnerable depositors and resolve deposit taker failures.
The FMA has said that it will be keeping a close eye on the treatment of finance companies under the Deposit Takers Act. It will also be paying attention to the treatment of deposit insurance, which will have flow-on impacts on disclosure settings under the Financial Markets Conduct Act.
Significantly, the RBNZ also flagged in its briefing that it will be considering a separate statutory executive accountability regime that requires senior executives of financial firms to act “responsibly and prudently".
New licensing regime for administrators of financial benchmarks
All provisions of the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Act 2019 come into force on
14 March 2021. This includes amendments to the FMCA that establish a new licensing regime for administrators of financial benchmarks. This regulatory regime is intended to align New Zealand with recent EU financial markets reforms. The FMA anticipates that the New Zealand Financial Markets Association (NZFMA), administrator of the Bank Bill Benchmark Rate (the main interest rate benchmark in New Zealand) will be the only administrator seeking a license.
Insurance contract law review continues
Following Cabinet's 2019 decision to reform various aspects of insurance contract law (see our
update here) MBIE is working with the FMA to release an exposure draft Bill for consultation in mid-2021. The proposed changes include:
requiring insurance policies to be written and presented clearly,
requiring insurers to respond proportionately when consumers do not disclose information,
narrowing the insurance-related exceptions from the Unfair Contract Terms regime under the Fair Trading Act, and
extending powers to the FMA to monitor and enforce compliance with the new requirements.
The FMA will be responsible for monitoring and enforcing compliance with the new requirements.
Climate-related financial disclosures regime edges closer
In September 2020, the Minister for Climate Change announced a climate-related financial disclosure regime affecting NZX-listed issuers, registered banks, credit unions, building societies, members of registered schemes, and certain licensed insurers. The regime would require, from 2023 at the earliest, relevant institutions to disclose prescribed climate-related information to investors, lenders, insurers and others. The specific disclosure requirements will be developed in line with the recommendations of the Task Force on Climate-related Financial Disclosures. Progress on a bill is expected in 2021 and it is expected that the External Reporting Board will set the relevant standard(s) for disclosures (in line with the recommendations of the Task Force). The FMA will monitor, enforce and report on the quality of these disclosures.
Significant changes for consumer credit providers
A series of significant changes to the Credit Contracts and Consumer Finance Act (CCCFA) will come into force in 2021. From
1 October 2021, there will be new prescriptive requirements for lenders assessing the affordability and suitability of loans, and a new requirement to keep records of their inquiries of borrowers and how they calculated their fees. In addition, lenders will need to obtain certification from the Commission (subject to certain exemptions for lenders regulated under other frameworks) which will require satisfying the Commission that the lender's directors and senior managers are “fit and proper persons". The Commission is establishing the function and registry for certification ahead of October 2021. Directors and senior managers will also need to exercise “due diligence" to ensure that the lender complies with the CCCFA (and can be personally liable for a breach of that duty).
In addition, the revised Responsible Lending Code will come into force on
1 October 2021. The final version of the Code has recently been released by MBIE.
In its briefing, the Commerce Commission has described its primary role in 2021 as enhanced investigation and enforcement of the CCCFA. In recent seminars the Commission has explained that one of its key consumer credit enforcement priorities for 2021 will be monitoring compliance with the new caps on fees and interest charged on high-cost consumer credit contracts.
Fair Trading Act updates
The Government's Fair Trading Amendment Bill is currently awaiting its second reading (after being discharged from the Select Committee in August 2020 without amendment, despite extensive submissions). MBIE expects the Bill to progress through Parliament this year. If passed, the Bill will introduce significant changes to New Zealand's consumer law landscape, including prohibiting unconscionable conduct in trade and extending protections against unfair contract terms to include small trade contracts. The majority of the Bill is expected to come into force one year after the Bill receives Royal Assent.
A Possible Consumer Data Right?
In its briefing, MBIE expressed an interest in introducing a 'Consumer Data Right' to facilitate access to consumer data. RBNZ intends to support MBIE's Consumer Data Right proposals. The right would allow individuals and businesses to securely share data held about them by businesses such as a bank or utility with trusted third parties (including to seamlessly switch between different providers). These changes follow the recent Privacy Act reform which came into force on
1 December 2020. To learn about how the new Act affects you, see our
recent client update here.
Bell Gully is monitoring these developments closely and will continue to provide updates to our clients. For more information on any of these matters, please get in touch with the contacts listed or your usual
Bell Gully advisor.
Litigation: Simon Ladd, Jenny Stevens, David Friar, Sophie East, Tim Fitzgerald, Blair Keown and
Banking and finance:
Murray King, David McPherson and Jennifer Gunser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.