Comment: NZ business, take note
Bell Gully partner Simon Ladd and senior associate Blair Keown look at how proposed MBIE legislation on financial governance would profoundly affect businesses and their customers
Banks and insurers may be on the front line as regulators focus on conduct and culture, but other financial institutions should also be thinking about the impact of proposed options on their businesses if they have yet to do so.
A paper released by the Ministry of Business, Innovation and Employment in April was primarily directed at banks and insurers, but also questioned whether heightened regulation should apply more broadly. This would bring a number of financial institutions that have historically sat outside the banking sector – KiwiSaver providers, non-bank deposit takers and lenders, brokers and others – into the mix. The result of a similar overhaul of financial sector conduct and culture in the UK was that this wider group should expect to be caught up in any changes.
There is a lot for them to consider (in addition to the recent Credit Contracts and Consumer Finance Amendment Bill and Financial Services Legislation Amendment Act). The MBIE paper contains almost 30 options that seek to address weaknesses in the governance and management of conduct risks and problems that have been identified around design, sales and use of financial products. These options represent a dramatic shift in the regulation of such institutions.
MBIE has said it is aiming to introduce legislation by the end of the year. Ongoing consultation will therefore be a critical opportunity to help shape what will be significant reform.
In the UK, conduct and culture was the focus of a new regime for senior managers in the banking industry which came into operation in March 2016. But those reforms stood on the shoulders of a parliamentary commission into banking standards that occupied 11 months, involved 40 public hearings and produced five separate reports. They also drew on at least 15 years of conduct regulation and eight separate consultations run by the regulators.
All financial institutions including those on the periphery of the banking sector should take note and adopt a proactive approach of measuring their own organisation against current expectations in terms of conduct and culture risks.
There is no equivalent information base in New Zealand, nor is there an existing comprehensive conduct regime. This country has not experienced a wide-ranging public inquiry that identified specific misconduct that reform needs to address. Combined with a reasonably brief initial consultation process, that information gap highlights a role for comprehensive industry input.
Some of MBIE’s proposals would apply generally across a financial institution’s activities, suggesting anyone from front line business personnel to back office support could face new requirements. For example, MBIE has proposed the imposition of six principle-based duties that would apply “to all aspects of a financial institution’s activities”. These duties include requirements to consider and prioritise the customer’s interest, ensure complaints handling is fair, timely and transparent and have systems and controls in place that support good conduct and address poor conduct.
Numerous roles within a financial institution will involve decisions that impact on customer interests, complaints handling, or the systems by which an institution manages conduct risk. From operations to compliance, audit and legal, many may find themselves within the perimeter of regulation. They will need clarity on what they can and cannot do.
Interested parties may well highlight a need for greater detail on MBIE’s preferred options before meaningful consultation – and good regulatory design – can occur. Those options cover a lot of previously unfamiliar ground: prohibitions on certain practices; principle-based duties, and the expansion of existing enforcement tools to facilitate compliance. The prospect of executive accountability for regulatory breaches will no doubt also provoke strong interest in the detail. Although MBIE is yet to provide any specifics of its thinking, it has expressed an attraction to directors and senior managers being held personally liable for an institution’s failure to meet its regulatory obligations.
In short, the changes under consideration will profoundly affect both a large number of businesses and their relationship with a very large number of customers. The Government’s desire for progress is understandable, but the implications for businesses, their employees and customers are such that the balance favours taking sufficient time to ensure that legislative change is well-designed, effective and durable.
How might the information gap be addressed? If the UK is anything to go by, further consultation will be needed over the course of this process. There, the new regime for senior managers was applied to the banking sector after at least eight separate consultations between July 2014 and February 2016. The consultations covered the detailed rules to be implemented, guidance on how the regulators would apply the rules, the specific activities in scope, the institutions caught and various transitional requirements.
Consultation continued as the regime was rolled out to insurers in the UK late last year, and continues still as other financial institutions are scheduled to join at the end of this year.
One option would be for staged consultation to take place over the remainder of this year, following MBIE’s review of the initial submissions. Information from the submissions that will shortly be received could be used to develop the details of a conduct regulation regime, delivering clarity around principles, guidance and any other specific rules on what those subject to the regime can and cannot do. That could be published for consultation, delivering a second round of design-focused submissions to inform the formulation of a near final conduct regulation regime.
The next round could provide detail covering which institutions and activities are in scope of that regime, how proposed changes would be incorporated alongside existing law, whether implementation would be staged (as has happened with the Anti-Money Laundering and Countering Financing of Terrorism regime) and possible implementation dates.
Regardless of the path that any further consultation takes, the likelihood of significant future reform cannot be ignored. All financial institutions including those on the periphery of the banking sector should take note and adopt a proactive approach of measuring their own organisation against current expectations in terms of conduct and culture risks. MBIE’s proposals are not just relevant to banks and insurers. Comprehensive conduct regulation is becoming a reality.
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