FMA Strategic Risk Outlook: what's new?

Thursday 25 July 2019

Authors: Amon Nunns, Blair Keown and Timothy Shiels

​​​​​​​​​​​​​​​​Key points

  • A new sector-based approach to risk and harm

  • Conduct regulation, climate change and technology identified as cross-sector themes

  • Corporate governance concerns in the listed sector

  • FMA adopts “credible deterrence" as a strategic priority

  • Bank and life insurer remediation may need to be quicker

  • Anti-money laundering remains a key area of focus.​


On Tuesday, the Financial Markets Authority (FMA) published its Strategic Risk Outlook and Annual Corporate Plan for 2019. Both documents signal a continuation of the direction of travel apparent in the FMA and RBNZ's Conduct and Culture Reviews of the Banking and Life Insurance sectors, reforms to financial advice regulation, and MBIE's proposals for a new conduct regulation regime. Specifically, there are indicators of:

  • increased regulatory expectations that go beyond the strict letter of the law and/or apply to activities that have not previously been a focus of the FMA; and

  • a more robust FMA enforcement response if those expectations are not met.

The Strategic Risk Outlook sets out the FMA's medium term (3-5 year) view of the most significant risks and opportunities in the New Zealand financial markets. The Annual Corporate Plan outlines specific regulatory activities that are intended to respond to those issues. The last Strategic Risk Outlook was published in 2017. Since then, the regulatory environment has changed dramatically. The 2019 documents provide an updated insight into the FMA's current regulatory priorities, and are the regulator's first major announcements under its new Chair, Mark Todd.

We set out some of the key messages below. ​

A new sector-based approach to risk and harm

In contrast to previous versions, the Strategic Risk Outlook for 2019 has adopted a sector specific focus based around capital markets, investment management, sales advice and distribution, and banking and insurance. For each sector, the FMA has identified trends and developments, specific risks, and outcomes to work towards.

Financial institutions should welcome this approach as they can easily identify the areas of immediate regulatory interest to the FMA in the sector(s) in which they operate. However, that does not mean that broader concerns can be ignored. The FMA has identified cross-sector risks that also need to be considered and addressed: governance and culture, incentives and conflicted conduct, investor and customer engagement and capability, anti-money laundering, and operating outside the regulatory perimeter. These will be familiar themes from previous Risk Outlooks and FMA Publications.

Cross-sector themes: conduct regulation, climate change and technology

Whereas globally the financial policy reform agenda is moving to a period of consolidation, the FMA has highlighted that New Zealand is undergoing a wide programme of legislative reform. In a nod to the proposals in MBIE's recent Conduct of Financial Institutions Options Paper, the FMA has identified the effective implementation of new conduct regulation as a key outcome for the banking and insurance sector - no mention has been made of the new regime applying more broadly. The successful implementation of the new financial advisers' regime has also been identified as a strategic priority.

Climate change has been identified as a significant driver of risk and opportunity across all sectors. Among other things, the transition to a low carbon economy and climate-change regulation is likely to give rise to a greater demand for green-related financial products and services and put an increased focus on pricing of climate change risk (e.g. carbon). Our note to boards about planning for the consequences of climate change can be found he​re​.

Technology and innovation is again a cross-sector focus, with the FMA identifying a number of specific regulatory concerns. These include:

  • 'big data' and risk-based profiling of customers, particularly in insurance, pricing certain customers out of the market altogether;

  • continued increases in algorithmic and high-frequency trading across NZX's markets giving rise to trading errors;

  • digital advice and crypto assets presenting risks of mis-selling and/or poor investor decision-making. As we have noted, blockchain technology is increasingly entering the mainstream.

Cyber resilience also remains an ongoing concern. Although the Strategic Risk Outlook notes that larger banks report high levels of cyber resilience.

Corporate governance concerns in the listed sector

The Strategic Risk Outlook indicates a hardening in the FMA's attitude towards the standard of corporate governance within listed companies. In the 2017 Outlook, the FMA reported that institutional investors were confident about the standard of corporate governance, but the FMA still saw room for boards and management to strengthen their practices. By contrast, the 2019 Outlook has identified ineffective corporate governance, poor culture in publicly listed companies and/or limited capacity and experience of directors as a key sector risk. The FMA has pointed specifically to a number of high-profile corporate governance and disclosure failures in 2018 and concerns about information flows between management and boards.

The adoption of “credible deterrence" as a strategic priority

For the first time, the Strategic Risk Outlook identifies “credible deterrence of misconduct" as a strategic priority for the FMA. In 2006, the UK Financial Services Authority (FSA) adopted a policy of “credible deterrence". It soon became associated with robust enforcement activity and headline-grabbing fines and penalties. As the FSA's Director of Enforcement, Margaret Cole, explained in 2009:

“Credible deterrence is all about delivering outcomes that make a real difference to consumers and to markets. It means delivering results that make people sit up and pay attention. It's about making people realise that they can suffer meaningful consequences if they break the law and if they don't improve their standards of behaviour."

Bank and life insurer remediation may need to be quicker

The Strategic Risk Outlook identifies the FMA's view that remediation of conduct issues in the banking and insurance sectors is too slow or insufficient, and lacks senior management focus. In 2019/2020, the FMA and RBNZ will be following up on their work into conduct and culture expectations for banks and life insurers. The quality and speed of banks and insurers' remediation of any historical or legacy issues is likely to be a focus of that follow up work by the FMA (alongside the RBNZ).

Anti-money laundering remains a key area of focus

As we suggested in a previous publication, the Financial Action Task Force's (FATF) impending assessment of New Zealand's anti-money laundering regime may have prompted closer FMA attention to anti-money laundering (AML) and countering financing of terrorism (CFT). The Strategic Risk Outlook acknowledges that FATF's evaluation of New Zealand's AML and CFT policies and practices may result in recommendations for changes in policy or monitoring approaches.

If you would like to discuss any of the matters raised in this article, please contact the authors or your usual Bell Gully advisor.​


Disclaimer

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.

For more information
  • Amon Nunns

    Partner Wellington
  • Anna Buchly

    Partner Auckland
  • David Friar

    Partner Auckland
  • Blair Keown

    Senior Associate Auckland
Related areas of expertise
  • Corporate governance and advisory
  • Banking and finance
  • Climate change
  • Debt capital markets
  • Derivatives
  • Equity capital markets
  • Financial sector regulation
  • FinTech
  • Insurance
  • Regulatory investigations and prosecutions