For many years, the FMA has described itself as an “outcome-focused” regulator. However, in this proposal, the FMA is seeking to formally adopt “seven fair outcomes” that will inform its supervisory and enforcement work. It has sought feedback on this proposed approach by 1 March 2024.
The FMA’s draft guidance and associated consultation warrant close attention. Although the guidance expressly states that it has no legal force, it raises important questions about FMA expectations and possible regulatory creep that have the capacity to affect all market participants.
We highlight some immediate areas of interest below.
“Outcomes-focused” regulation
The FMA has said it is embedding a regulatory approach that puts fair outcomes for consumers and markets at the heart of its work. According to this approach, the FMA will set out the outcomes that regulation seeks to achieve and then “step back” and let firms find the most efficient way of achieving them.
The proposed “fair outcomes”
The FMA has identified seven fair outcomes or end-results that it is seeking for consumers and markets. They are:
- Consumers have access to appropriate products and services that meet their needs.
- Consumers receive useful information that aids good decisions.
- Consumers receive fair value for money.
- Consumers can trust providers to act in their interests.
- Consumers receive quality ongoing care.
- Markets are based on their integrity and transparency.
- Markets enable sustainable innovation and growth.
Few would dispute the basic merit of these ideas. However, they do not easily translate into a clear, coherent and workable regulatory regime. The Financial Markets (Conduct of Institutions) Amendment Act 2022 (COFI) has already illustrated the uncertainties of a regulatory obligation to “treat consumers fairly”. The FMA’s adoption of a further catalogue of “fair outcomes” that do not have a legal basis, do not match how “treating consumers fairly” has been defined by COFI, and do not have any expressed connection with the COFI regime risks further complicating an already uncertain regulatory landscape.
Fair value for money
Included in the FMA’s seven fair outcomes is an expectation that “consumers receive fair value for money”. The FMA has described this outcome as referring to “fairness to consumers in pricing and equity in exchange of value”. This represents a potentially significant extension of the FMA’s regulatory remit. To date, the FMA has confined its scrutiny of value for money to the Kiwisaver and managed investment schemes sector as well as examining how providers communicate with customers in relation to poor value products.
A suggestion that the FMA might go further and intervene more broadly in relation to substantive questions of pricing or value merits careful consideration. Pricing and value are not easy concepts to regulate, particularly in the absence of a detailed underlying legal regime. The UK’s ongoing attempts to address value for money in the pensions industry illustrates the complexity of the issue, the difficulties in reliably assessing whether consumers are receiving value for money, and the need for primary legislation to facilitate effective regulation.
The role that “fair outcomes” will perform
The FMA has said that the “fair outcomes” are not rules and do not create, replace or even supplement existing legal obligations. At the same time, the FMA has said that “providers will need to take ownership of the fair outcomes”, “demonstrably embed them in the way they operate”, and “understand how their governance, leadership, management and operations can deliver the fair outcomes and where they need to make changes”. The FMA has also said that it will be outspoken when it sees practices that are unfair and take enforcement action where appropriate.
These statements and the consultation that is now taking place raise the possibility of “fair outcomes” giving rise to a de-facto regulatory regime. That is, a set of regulatory expectations that providers must meet in order to maintain a positive ongoing relationship with the FMA and the FMA can test through thematic reviews, requests for senior management attestations, and section 25 notices.
What about COFI?
The draft guidance is noticeably silent on the COFI regime. COFI is not mentioned at all in the draft guidance and there is no indication of how the FMA’s proposed fair outcomes will interact with the COFI regime and the statutory principle of “treating consumers fairly”.
A comparison between the draft guidance and the contents of s 446 of COFI confirms that the FMA’s proposed “fair outcomes” do not neatly match how “treating consumers fairly” has been specifically defined in the legislation. Those familiar with the COFI consultation process will recall that these specific requirements of “treating consumers fairly” were the subject of considerable comment and debate. The introduction of a further catalogue of fairness-related outcomes sits awkwardly with the specific settings chosen by parliament.
What’s next?
The FMA’s draft guidance raise a number of important questions that providers of financial products and services would be well advised to consider.
The FMA identified 18 questions for which it has requested responses. Submissions are due by 1 March 2024. Bell Gully will be following the consultation process closely.
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.