FMA's long-awaited update on outcomes-focused regulation

The Financial Markets Authority (FMA) has published its updated approach to outcomes-focused regulation.

The updated document follows FMA consultation on its proposed outcomes-focused regulatory approach, which closed just over a year ago. We submitted on that consultation, highlighting our concerns with the proposed approach and its effect on industry participants. We were concerned the approach proposed had not been considered against the costs it would impose on industry participants, risked regulation by hindsight, introduced regulatory uncertainty, confused existing rules and did not have a clear legal basis.

 

What's changed?

The FMA received 50 submissions on its consultation. The FMA has acknowledged that the submissions indicated it hadn't done a good job at communicating its proposed regulatory approach. The updated document seeks to clarify this.

The seven "outcomes" (fair services; quality ongoing service; improved access to products and services; resilient markets and providers; market innovation and growth; well-informed investors and consumers; market integrity and transparency) at the centre of the approach have been reframed but, with one notable exception, still broadly map to the seven "fair outcomes" the FMA originally consulted on. The exception is the "value for money" outcome. In the final guidance, "value for money" has been substituted with "fair services" — defined as "deliver[ing] what is promised, expected benefits reflect risk, and providers do not improperly take advantage of information or power asymmetries."

There are other changes. Some of the language in the earlier consultation draft was interpreted as seeking to impose new obligations or expectations on industry participants. This has been removed. It now seems clear the outcomes are not a new set of expectations for participants but instead a framework through which the FMA will decide how to focus its regulatory effort. This is accompanied by other changes in terminology: "fair outcomes" are now simply "outcomes", and "consumers" are now more consistently referred to as "investors and consumers".

The way the FMA plans to use the outcomes in practice is also much clearer. As foreshadowed in FMA Chief Executive Samantha Barrass' speech at the Financial Services Council's Outlook 2025 event earlier this year, the FMA plans to publish an annual "Financial Conduct Report" setting out the FMA's regulatory priorities for the year by reference to the outcomes (and the risks identified by the FMA to achieving those outcomes). Those priorities will then inform FMA's supervision of industry participants over the course of that year. We expect the first Financial Conduct Report in June.

The updated guidance also reinforces earlier messaging from the FMA about the "regulatory perimeter" i.e., products and services not subject to licensing or formal supervision such as the "wholesale" market, custody, funds administration and crypto-asset services. The FMA has signalled that this is an area of focus and one where they will be taking the same approach as to their supervised entities.

 

Our views

The FMA's updated approach to outcomes-focused regulation substantially addresses much of the feedback provided on the consultation draft. This is pleasing and we expect the revised direction of travel in the final guidance to be cautiously welcomed by many industry participants, advisers and commentators.

An example is the substitution of "value for money" with "fair services". In recent years, the FMA's value for money initiatives have been the source of some controversy. Concerns have been raised about the cost of meeting regulatory expectations that have no clear statutory basis, as well as the possible unintended consequences of what could be seen as indirect price control. The refocusing on "fair services" is a promising sign these concerns are now being heard.

We are optimistic about the Financial Conduct Report and proposed supervisory approach. The FMA is an important public body with a broad mandate and extensive powers. A significant majority of its (substantial) resourcing is funded by the population it regulates. In that context, we think a regular and open dialogue with that constituency about why, where and how the FMA will be targeting its regulatory efforts makes sense and is a move in the right direction. We are encouraged by the tone and style of the guidance which is clear, concise and clearly signals areas of interest.

We also welcome signals the FMA will be reflecting on its enforcement approach. Given its broad discretionary powers, we would like to see wider discussion on appropriate guidelines and safeguards to ensure the approach to enforcement is reasonable and proportionate.

With that said, there may still be challenges ahead. The FMA has started talking about applying the "so what?" (i.e., does it really matter?) test to regulatory action. This is positive and aligns with the approach signalled in the final guidance. But it does beg an important question: will the regulatory action the FMA currently has underway now be robustly and objectively reassessed against these go-forward criteria? Does it really meet the "so what?" test and how does it relate to the outcomes?

In our view, these are important questions for the credibility and success of the outcomes-focused approach.

If you would like more information on outcomes-focused regulation and what this may mean for you, please get in touch with one of our contacts.