Consultation on the draft guidance is open until 14 April 2023. Banks, insurers, non-bank deposit takers and intermediaries are encouraged to review the draft guidance in detail. We highlight five immediate areas of interest below.
Fair conduct requirements extend to all distribution channels
Under the COFI Act, fair conduct programmes must:
- Provide for distribution methods to operate in a manner that is consistent with the fair conduct principle to treat consumers fairly: s 446J(1)(b)(i).
- Regularly review whether the distribution methods are operating in a manner that is consistent with the fair conduct principle: s 446J(1)(b)(ii).
- Ensure that any deficiencies identified in how distribution methods are operating are remedied within a reasonable time: s 446J(1)(b)(iii).
The draft guidance provides that these requirements apply to all distribution channels, regardless of whether the distributor is characterised under the COFI Act as an “intermediary”, “agent” or both.
More detail about the requirements of fair conduct programmes can be found here.
Fair treatment is the shared responsibility of financial institutions and intermediaries
The draft guidance indicates that financial institutions should identify and document the respective roles and responsibilities of the institution and their intermediaries in supporting fair treatment in distribution (particularly in relation to customer communications). The FMA has said that it will often be appropriate for institutions and intermediaries to work together on remediation exercises.
There is a practical difficulty implementing a “shared responsibility” approach to compliance in circumstances where only one party to the relationship (i.e. financial institutions) has the relevant legal obligations (i.e. to treat customers fairly). The FMA has identified contractual obligations and the requirements of the financial advice regime as mechanisms that can help to drive good conduct by intermediaries in these circumstances.
Risk-based approach to distribution methods to address overlapping regulatory regimes
A consistent criticism of the COFI Bill and fair conduct programme requirements has been the potential overlap of its obligations with other relevant regulatory regimes, e.g. the financial advice regime. In response, the FMA appears to have acknowledged that financial institutions can take a risk-based approach when determining how intensively they ensure distribution arrangements are delivering fair treatment.
In that context, intermediaries that hold a Financial Advice Provider licence and are regulated under the financial advice regime may pose “a reduced level of risk to consumers” that justifies fewer policies, processes, systems and controls than other distribution methods that aren’t directly regulated. For example, when providing product information and training to intermediaries, financial institutions can give weight to the standards of competence, knowledge and skill that Financial Advice Providers must meet under the financial advice regime and adjust their approach accordingly.
Managing compliance costs through “proportionality” and a “risk-based approach”
The draft guidance emphasises the relevance of “proportionality” and “a risk-based approach” to the design and implementation of fair conduct programme distribution requirements. Helpfully, the guidance indicates that financial institutions should resist imposing compliance measures on intermediaries that exceed the requirements of a risk-based approach. The draft guidance is also clear that the FMA does not expect “constant surveillance of intermediaries”, “monitoring individual instances of advice or individual sales”, or financial institutions “supervising intermediaries’ legal compliance”.
The emergence of compliance attestations
The FMA identifies the use of attestations as a potentially effective mechanism for supporting (but not totally fulfilling) their distribution expectations. The FMA has said there is scope for representative groups developing industry wide compliance attestations, i.e. sector-specific standard templates by which intermediaries can confirm their compliance with necessary fair conduct obligations. The FMA has, however, said that it sees attestations as a “lighter” compliance measure, appropriate for “lower-risk” distribution methods, and to be used in conjunction with other review processes.
Next Steps
Submissions on the draft guidance close on 14 April 2023. Bell Gully will be following the consultation process closely.
Financial institutions will be able to apply for a COFI licence from 25 July 2023. A successful application will require a complete fair conduct programme to already be in place.
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.