As currently drafted, the Bill will bring registered banks, licensed insurers, and registered non-bank deposit takers within a principles based fair conduct regulation regime that promises to have a significant impact on the management of conduct risk and the delivery good customer outcomes.
In this update, we summarise the COFI Bill as it currently stands.
The COFI Bill as it now stands
The Bill adopts the changes that were recommended by the Finance and Expenditure Select Committee in August 2020. Key amendments include:
- Providing more detail of the fair conduct ’treating customers fairly’ principle that underpins the whole regime.
- Adding further minimum requirements for the fair conduct programme that each financial institution will be required to adopt.
- Reducing the regulatory responsibility of financial institutions for the conduct of their intermediaries.
- Introducing a decision-making framework for the responsible minister to address before imposing regulations relating to the offering of incentives.
- Providing a limited regulation-making power to exempt specified types of financial institutions from the requirements of the conduct regime.
For more detail on the Committee’s recommendations see The Big Picture: financial markets - greater detail on the conduct regulation regime.
Criticism of the Bill
The COFI bill does not have unanimous parliamentary support. The proposals were heavily criticised during the most recent parliamentary debates. The Opposition has described the Bill as adding to an “avalanche of legislation” that is being imposed on the financial sector (see for example, recent amendments to the Credit Contracts and Consumer Finance Act). Concerns have also been raised about the compliance burden of the new conduct regime and the limited segment of the finance sector that will be captured by the regime (i.e. banks, insurers and registered non-bank deposit takers and their intermediaries).
Estimates suggest 90% of all persons registered on the FSPR will not be expressly subject to the COFI regime. Many submissions on the Bill have already identified the uneven regulatory playing field that may result. Some institutions will be subject to wide ranging conduct and incentive regulation, while other providers of the same services or products will not.
A supplementary order paper will make further amendments to the Bill, which will then be considered by the Committee of the Whole House. These amendments have been set out in a recent cabinet paper. They comprise:
- The removal of prescriptive obligations on financial institutions to train, manage or supervise intermediaries. It is unclear whether this will in fact reduce the regulatory responsibility of financial institutions for their intermediaries given they will still be required to have effective policies, processes, systems and controls in respect of their distribution arrangements.
- Narrowing the definition of ‘intermediary’ to only those who are selling or distributing products or services to consumers. This means financial institutions would have responsibilities to oversee intermediaries involved in sales and distribution, but not parties involved in broader preparatory, administrative and claims fulfilment services.
- Introducing a specific requirement for financial institutions to take into account vulnerable customers when developing their fair conduct programmes.
Once the Bill has been read by the Committee of the Whole House it will proceed to a third reading before it receives the Royal Assent. Recent cabinet papers suggest that the Bill will be enacted in the middle of this year.
What about regulations?
Aspects of the new conduct regime will also be addressed by more prescriptive regulations (e.g. sales incentives and specific fair conduct programme requirements). An exposure draft of those regulations is yet to be circulated for consultation. However, it is expected that these will contain a prohibition on financial institutions and intermediaries offering sales incentives based on volume or value targets to frontline employees, agents and intermediaries.
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 adviser.