Feedback on a bill to strengthen consumer protection in the insurance and banking sector has prompted a loosening of the proposed rules
Industry and consumer representatives say they are happy with a Government decision to pull back on proposed fair conduct regulations for banks and insurers, but experts warn the regulator will still need to keep a close eye on financial institutions to ensure they act in good faith.
The wordily-named Financial Markets (Conduct of Institutions) Amendment Bill aims to tighten up regulation of the banking and insurance sectors by ensuring they comply with fair conduct principles, and consumers don’t lose out.
The draft bill is awaiting its second reading in Parliament. It initially required financial institutions to train and manage or supervise intermediaries involved in the provision of financial products and services – mortgage or insurance brokers, for example – to ensure consumers are treated fairly.
But this requirement got push-back during public consultation, and now Commerce and Consumer Affairs Minister David Clark is proposing this requirement be removed.
“Stakeholders have raised concerns about these requirements, including that the obligations are too broad, unworkable, or duplicate the new regulatory regime for financial advice,” Clark said.
“I agree these obligations are too prescriptive and may lead to undesirable structural changes in the market, including intermediaries reducing the number of institutions they work with (in order to not have to comply with requirements stemming from a number of different conduct programmes),” he says. “This could reduce competition and consumer choice.”
“…But the Financial Markets Authority and the Minister’s office will need to watch the industry really carefully to make sure consumers remain protected.”
– Jon Duffy, Consumer NZ CEO
Jon Duffy, chief executive of Consumer NZ, agrees. He thinks there was a risk the broker market could have been damaged if changes were rolled out as initially suggested.
“You’d have the main financial institutions saying, ‘If we are responsible, we want these people on our payroll, so we will employ them as direct sales staff.’ In theory that would reduce consumer choice when it comes to acquiring products,” he says.
But he’s warning regulators and the Government that they will need to keep a close eye on whether institutions act in good faith.
“I think he’s found a good place in an attempt to strike a balance between regulatory over-reach and practical implementation. But the Financial Markets Authority and the Minister’s office will need to watch the industry really carefully to make sure consumers remain protected.”
Duffy points to the beleaguered Credit Contracts and Consumer Finance Act as an example of legislation that had to be tweaked after becoming law because of unintended consequences when applied to the real world.
Last month the Government was forced to amend the CCCFA legislation – intended to stop unscrupulous loan sharks saddling borrowers with debt they can’t afford – when risk-averse banks began asking for huge amounts of personal financial information from legitimate borrowers before giving them a mortgage, blocking many people from getting a loan.
“I do like that it’s principle-based rather than being prescriptive because it allows for society and commercial practices to evolve around the legislation,” Duffy says.
“As long as you make reasonable inquiries and ask for a broker to provide their qualifications, or have a financial advisor satisfy you that they’ve got the required level of training, that seems like a practical way through that.”
The Financial Services Council is among the stakeholders that flagged concerns around how the draft bill regarded intermediaries.
The council submitted there were “uncertainties on what oversight of an intermediary by a financial institution” would look like, and what powers a bank or insurer would have to ensure compliance.
It also raised the possibility that intermediaries could favour some financial institutions over others, depending on how easy it was to work with them.
The latest adjustments are sensible, FSC chief executive Richard Klipin told Newsroom, and should help ensure the new financial markets conduct legislation is done right first time.