Final Guidance on Intermediated Distribution
The Financial Markets Authority – Te Mana Tātai Hokohoko (FMA) has released its final guidance for the intermediated distribution of financial products. The guidance outlines the FMA’s expectations under the COFI regime when financial institutions are distributing products and services through intermediated channels.
The final guidance clarifies certain aspects of the draft guidance published in February 2023 (which we wrote about here).
Fair conduct requirements extend to all distribution channels, including group insurance schemes
Under the COFI Act, financial institutions’ fair conduct programmes must:
- Provide for distribution methods to operate in a manner that is consistent with the fair conduct principle to treat consumers fairly: s 446J(1)(b)(i).
- Regularly review whether the distribution methods are operating in a manner that is consistent with the fair conduct principle: s 446J(1)(b)(ii).
- Ensure that any deficiencies identified in how distribution methods are operating are remediated within a reasonable time: s 446J(1)(b)(iii).
The FMA’s final guidance confirms that these requirements apply to all distribution channels, regardless of whether the distributor is characterised under the COFI Act as an “intermediary”, “agent” or both.
Submissions on the draft guidance sought clarification on whether, in the context of group insurance schemes held by employers for the benefit of their employees, employers would be considered intermediaries. The FMA has confirmed that, although the employer would not meet the definition of “intermediary” generally, distribution through an employer/group scheme is an example of intermediated distribution. As a result, financial institutions will need to consider how they ensure that any group insurance schemes in which they are involved operate in a manner consistent with the fair conduct principle. That will require active consideration of the interests of employees within a given group insurance scheme.
Clarification on the “shared responsibility” between financial institutions and intermediaries for fair treatment
The FMA’s draft guidance indicated that financial institutions should identify and document the respective roles and responsibilities of the institution and their intermediaries in supporting fair treatment in distribution (particularly in relation to customer communications). The draft guidance specifically identified a “shared” responsibility model whereby institutions and intermediaries would work together to ensure customers would be treated fairly.
The FMA has now clarified that references to shared responsibility are not intended to imply additional duties beyond what is already imposed by the COFI Act. The final guidance records the FMA’s expectation that “institutions and intermediaries will collaborate where it is appropriate and necessary to ensure consumers are treated fairly.” In determining the type or level of collaboration, financial institutions will need to consider a range of practical matters including the allocation of responsibilities in their distribution agreements, the parties’ respective access to customer information and who is best placed to efficiently resolve relevant consumer facing issues.
The FMA has said that it will be particularly interested in situations or arrangements “where fair treatment of consumers and remediation of deficiencies in the distribution methods are inhibited by a lack of collaboration between financial institutions and intermediaries.”
Licensed financial advice providers pose a reduced risk of non-compliance with the fair conduct principle
The draft guidance acknowledged that intermediaries who are licensed financial advice providers pose a reduced level of risk that they will not meet the fair conduct principle. The final guidance confirms that financial institutions can take this reduced level of risk into account when determining the arrangements they need to ensure financial advice providers operate in a manner that is consistent with the fair conduct principle. Ultimately, it is for the financial institution to assess the specific risks presented by their intermediaries, including those who are financial advice providers.
Compliance attestations are to be used as a risk-based measure
In its draft guidance, the FMA identified the use of attestations as a potentially effective mechanism for supporting (but not totally fulfilling) expectations of good distribution methods. Attestations involve intermediaries periodically declaring their compliance with or completion of certain matters, to the financial institution.
The FMA has confirmed in its final guidance that attestations are a “lighter” compliance measure and would expect to see them being used only for lower-risk distribution methods, in conjunction with other processes. For “higher-risk” distribution methods (i.e., where there is a higher potential risk of unfair treatment), the FMA expects attestations to be used less and supplemented by supporting evidence or independent investigation/validation. The use of attestations will be a decision for each institution to make based on their own risk assessment of their distribution methods.
Prohibition on incentives confirmed by new regulations
On 6 June 2023, regulations relating to sales incentives and COFI licensing fees were made. (See here).
As expected, the incentives regulations prohibit financial institutions and intermediaries from offering or giving incentives that are determined or calculated in any way by a direct reference to a target or other threshold that relates to the volume or value of the services or products.
The regulations contain two specific examples of “prohibited incentives”:
- Target-based incentive – Where the employee of a life insurer is offered a $1,000 bonus for selling 100 policies in a particular timeframe. This would be prohibited because the entitlement to the bonus is determined by direct reference to the sales target.
- Threshold-based incentive – Where an employee receives an annual bonus calculated on a sliding scale. This is where the bonus is calculated as a percentage of the employees’ base salary and that percentage varies depending on the customer funds invested in a product. This would also be prohibited because it is determined by reference to thresholds relating to volume or value.
The regulations also confirm that linear-based incentives (i.e., incentives that are provided per product or service) and wholesale incentives (i.e., incentives where the customer is a wholesale client) are not prohibited. That is, where the incentive is determined on a linear basis or where the incentive is determined by direct reference to a target or threshold that relates to the volume or value but the services or associated products are provided to wholesale clients only.
COFI licensing fees
The regulations also set the licensing fee for financial institutions applying for a market services licence under the COFI regime.
Under the regulations, financial institutions applying for a licence will be required to pay $1,024.93 plus an hourly rate of $178.25 in respect of any time taken to consider the application that exceeds 6.75 hours.
Financial institutions will be able to apply for a COFI licence from 25 July 2023. Registered banks, licensed insurers and licensed non-bank deposit takers that are in the business of providing one or more relevant services to consumers will need a COFI licence to continue to operate once the COFI Act is fully in force from 31 March 2025.
A successful licensing application will require the financial institution to have a complete fair conduct programme in place. As a minimum requirement, fair conduct programmes must provide for effective policies, processes, systems and controls relating to intermediated distribution and incentives. We’ve written about the requirements of fair conduct programmes which can be found here.
Financial institutions and intermediaries should also review their incentive programmes to ensure they are not offering “prohibited incentives.”
If you have any questions on the matters raised in this article, or would like assistance with your own submission please get in touch with the contacts listed or your usual Bell Gully adviser.