New licensing regime begins for NZ banks, insurers

Financial Markets Authority (FMA) has announced it has begun accepting applications for licences under its Conduct of Financial Institutions (CoFI) regime.

New Zealand’s chief financial regulator has called on banks, insurers and credit unions to register under a new licensing regime that will require they engage in fair conduct with their customers.

The Financial Markets Authority (FMA) has announced it has begun accepting applications for licences under its Conduct of Financial Institutions (CoFI) regime.

CoFI requires regulated entities to “establish, maintain and implement a fair conduct program”, putting, the FMA said, “fair treatment at the heart of their business”.

“[Regulated entities] must take all reasonable steps to comply with the program and with regulations that ban target-based sales incentives and regulate other types of incentives.”

The new regime officially comes into force on 31 March 2025.

FMA executive director of regulatory delivery, Clare Bolingford said the new rules apply “when institutions are designing products and at the point of sale, where financial institutions should think about whether the product is right for the consumer rather than selling to just anyone”.

“And it remains front of mind post-sale and throughout the customer relationship, particularly when consumers need clear information or when dealing with a claim or complaint.”

While regulated institutions will need to establish their fair conduct programs before a licence application is submitted to the FMA, the regulator noted, these programs will not need to be fully implemented until the regime comes into force in 2025.

The introduction of the new regime follows an amendment to the Financial Markets (Conduct of Institutions) 2013 Act, which effectively birthed the CoFI Act, introduced last year.

The amendment came in response to findings from joint reviews by the FMA and Reserve Bank of New Zealand, into the conduct and culture of banks and life insurers, conducted in 2018 and 2019, respectively – in large part inspired by the findings of Australia’s Hayne Royal Commission, which investigated misconduct within Australia’s financial services sector.

The NZ investigation noted that the country’s four largest banks are Australian-owned, raising immediate concern that similar failings exist within the NZ market.

Each report found widespread failures within NZ’s financial services sector to implement systems and processes that would ensure fair treatment of consumers.

In particular, the banking sector review, whilst prefacing that the concerns were not necessarily widespread, found instances of inappropriate lending and sales, product and service fees that materially outweighed benefits to customers, manipulation of customer records to influence satisfaction outcomes, and manipulation of branch sales records.

Examining and unearthing weaknesses in 11 New Zealand-based banks, the review also found significant variation in the maturity of banks’ approaches to identifying, managing and remediating conduct risks and issues.

“While some banks have been thinking about conduct and culture for some time prior to our review, the approach of others can be described as reactive at best, and complacent at worst,” the report wrote.

It added: “Overall, there are weaknesses in the governance and management of conduct risks, and significant gaps in the measurement and reporting of customer outcomes. These weaknesses leave New Zealand banks vulnerable to misconduct and to the issues seen in other jurisdictions.”

The CoFI is similar in scope to Australia’s Design and Design and Distribution (DDO) obligations, introduced in late 2021, which mandates that distributors of financial products in Australia ensure that these products are consistent with consumers’ objectives, financial situation and needs and that issuers and that distributors take “reasonable steps” to ensure products only reach the defined consumers.

Bolingford, in response to the release of the new licencing regime, added: “It is important that consumers get the financial products and services they need throughout their life, when they need them, and have trust and confidence they will do what they are meant to.”

“The overarching requirement for institutions to ‘treat consumers fairly’ is paramount throughout the lifecycle of a financial product.”