MBIE announces second phase of financial services reform

The Ministry of Business, Innovation & Employment (MBIE) has launched its “fit for purpose” financial services reform consultation package. The consultation seeks feedback on proposed reforms in three areas of financial services regulation.

There is a short window for consultation. MBIE is seeking written submissions by 17:00 on Wednesday, 19 June 2024.

This is “phase 2” of the coalition Government’s two-phase reform of the financial services industry. Phase 1 introduced the repeal of the affordability regulations under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and made other lending rule changes. You can find more information about phase 1 in our previous client update, here.

Phase 2 contains more comprehensive reform proposals for three key areas of financial services regulation. The proposals are contained in three discussion documents covering the following areas:

• consumer credit legislation (ie CCCFA);
• financial services conduct regulation (ie Financial Markets (Conduct of Institutions) Amendment Act 2022 (CoFI)); and
• effective financial dispute resolution (ie Financial Service Providers (Registration and Dispute Resolution) Act 2008).

You can find more information on the consultation, including the discussion documents and detail about making a submission, on MBIE’s website, here.

Who should read the consultation documents?

The consultation package is important for all firms regulated by the Financial Markets Authority (FMA) or the Reserve Bank of New Zealand (Reserve Bank). Note in particular there are proposed new regulatory tools for all FMA-regulated firms.

We suggest all financial services firms read the consultation documents and consider making a submission on one or more of the three reform areas.

What are the proposals?

Generally, MBIE is seeking industry views on whether the current financial services regulations are “fit for purpose”. Below we’ve highlighted some of the key areas MBIE is seeking feedback on.

On consumer credit legislation:

• whether changes are needed to settings for directors’ and senior managers’ personal liability for due diligence obligations under the CCCFA, to address the unintended chilling effects that current settings have had on lending practices;
• disclosure requirements, including what and how information should be disclosed and penalties for incomplete disclosure; and
• whether the high-cost credit provisions in the CCCFA should be expanded to capture relevant contracts with an interest rate of 30% or higher, to mitigate the financial harm caused by debt problems.

Note that MBIE is not seeking views on transferring regulatory responsibility for the CCCFA from the Commerce Commission to the FMA.

On financial services conduct regulation:

• whether to amend the minimum requirements for “fair conduct programmes” required under CoFI, with a preference to reduce or simplify, with the objective of providing flexibility for means of compliance while maintaining sufficient certainty and clear standards of conduct;
• whether to amend the fair conduct principle, with a preference to keeping the definition open-ended;
• a proposal to consolidate conduct licensing and making it mandatory for the FMA to issue a single conduct licence covering multiple market services, to reduce compliance costs;
• whether to allow the FMA and Reserve Bank to rely on each other’s assessments of dual-regulated firms (eg fit and proper assessments) when appropriate, to avoid duplication and reduce regulatory burden and thus support effective and efficient twin peaks regulation; and
• a proposal to provide the FMA with additional tools, including without-notice on-site inspections, change in control approvals and commissioning expert reports. These are intended to align the FMA’s powers with the Reserve Bank’s and with international practice.

On financial dispute resolution:

• options for improving consumer awareness of and access to dispute resolution schemes; and
• options for enhancing dispute resolution schemes’ effectiveness through improved oversight and accountability.

MBIE notes that consolidation of dispute resolution schemes is specifically out of scope of phase 2. According to the discussion document, this is because “it will take time to see how the regulations to align the schemes’ rules… are working to improve outcomes for consumers”.

Our view

The general proposal to attempt to reduce regulatory burden will be welcomed by the industry. This largely follows through on previous announcements by the Government to reduce regulatory burden by consolidating compliance obligations. However, the proposals appear to give with one hand and take with the other as they also propose powers for the FMA to conduct on-site inspections (in addition to the FMA’s existing inspection power under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009), to commission expert reports, and to approve changes in control for all licensed firms (as opposed to the current notification requirement). These risks increasing the compliance burden, especially where participants may be subject to the same tools from two regulators. The potential to allow a regulator to rely on the assessment of another, or have regard to it, may go some way to reducing this burden, however the proposal does not require a regulator to rely on the other’s assessment, so participants will still be at the whim of the oversight approach of two regulators.

In considering the various options proposed, MBIE seems to acknowledge that the balance is between more prescriptive legislation, and therefore less flexibility for firms, and more flexible FMA guidance. MBIE’s view is that it is more appropriate that certainty about regulatory standards be provided through primary or secondary legislation rather than by FMA guidance, although elsewhere suggests that broad regulation making powers and FMA guidance can fill the gaps.

On CoFI, captured firms (banks, insurers and non-bank deposit takers) may be disappointed to learn that the consultation does not propose to amend the current commencement date of the CoFI regime (31 March 2025). This may mean that captured firms will be hit with “double-compliance”. That is, firms will need to apply for and receive a conduct licence by 31 March 2025 and may need to review and, if necessary, adjust their fair conduct programmes to comply with any reforms, not expected to come into force until 2026.

In terms of consolidating licences, it does not appear to be proposed that all market participants will need to apply for a new consolidated licence, but that instead the existing licences will be consolidated into a single conduct licence. It remains unclear what this will look like in terms of ensuring that compliance obligations (such as reporting) are not duplicated. In addition, those regulated by both the FMA and RBNZ (such as insurers) will still need to have two licences, and duplicate obligations, under their respective governing legislation. Whether the consolidation actually results in reducing regulated firms' compliance burden is yet to be seen and will depend on not just the legal framework but also the operational implementation of the licensing process (and associated ongoing supervision). Pleasingly, there is no suggestion that CoFI obligations will apply across all licensed market services. We think this is the right approach and that conduct risk for other licensed market services is adequately addressed by existing controls.

We agree it is necessary to ensure the FMA has effective tools to monitor the compliance of regulated firms. However, we have reservations as to whether expanding the FMA’s on-site inspection powers to include warrantless searches is a reasonable and proportionate device. The FMA already has expansive powers under section 29 of the Financial Markets Authority Act 2011 to enter and search premises without notice, subject to first obtaining a warrant from an issuing officer (eg a judge). The consultation material does not identify any specific mischief that would justify a departure from the safeguards afforded by this well-established practice. Consistent with that observation, we note that in 2021 Treasury, in considering whether the FMA’s powers should be expanded in the same way identified for the RBNZ, concluded there was no demonstrated problem warranting such a wide-ranging power being introduced.

We are in a period of significant reform for the financial services industry in New Zealand. As well as this consultation, the industry is also grappling with the FMA’s “fair outcomes” approach to regulation (see our article and submission here), the new Contracts of Insurance Bill (see our article here) and the move towards “open banking” with the Customer and Product Data Bill. We are also expecting reforms to the Companies Act 1993 and KiwiSaver over the medium term.

Understandably, some firms may be experiencing “consultation fatigue”.

Please get in contact if you have any questions about the ongoing financial services reforms or would like any assistance drafting a submission on the current consultation.

Next steps

Consultation closes at 17:00 on Wednesday, 19 June 2024. Following the consultation, MBIE will make recommendations to Minister Bayly. We expect Minister Bayly to return to Cabinet to seek policy decisions on the proposed reforms around August 2024.

Minister Bayly has announced that he expects to introduce a reform bill to the House by the end of 2024. We expect this bill will come into force no earlier than Q3 2025.

We will continue to keep you apprised of any relevant updates.