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by Stephen on October 31st, 2014

31 October 2014


Focus on improving conduct and increasing trust in financial markets

In a speech to INFINZ yesterday, FMA Chief Executive Rob Everett has set out what he described as the evolving approach for the FMA as the regulator’s mandate expands under the Financial Markets Conduct Act, taking effect from 1 December.

Mr Everett said that the FMA would be setting high expectations of conduct, how firms and professionals behaved, both between themselves and between firms and consumers and investors – and would continue to intervene to prevent poor quality outcomes for consumers and investors.

He also noted that the FMA’s mandate is expanding, from 1 December, with several hundred businesses and professionals expected to apply for new licences. Licensing allows the FMA to establish minimum standards for firms and professionals who want to deliver financial services. But this is only part of the increased powers granted to the FMA under the Financial Markets Conduct Act.

The FMC Act also places the good conduct of professionals and firms at the heart of the FMA’s remit. Conduct regulation is new to New Zealand and Mr Everett says that it will deliver a step change in the way financial services are provided in the years ahead.

Referring to the findings of the Capital Markets Development Taskforce about the need for a modern and effective financial regulator to have a full range of regulatory tools and powers at its disposal, Mr Everett said that the FMA will be looking to use all of its new powers, including licensing, supervision, compliance and enforcement,  to react to potential harms that may arise in the markets. Some of the new powers allow the FMA to be proactive, by anticipating problems, and acting before they cause direct harm.

The speech also provides some insight into the work the FMA has been doing to identify its strategic priorities for the medium term. Specifically, the FMA is completing a wide-ranging analysis of the sectors it regulates, identifying the areas of greatest potential concern. Mr Everett noted that the complete results of that analysis, identifying the priority areas where the FMA would focus most attention, will be published later this year.

Three of the priority areas that have identified, are:

• Sales and advice
• Conflicted conduct
• Governance and tone at the top

Sales and advice

The risks seen by the FMA as having the potential to produce low-quality conduct and lesser-quality outcomes, include:

• variable quality of advice to consumers and investors (including QFEs, as well as in the AFA and RFA sectors)
• constraints on access to advice for consumers and investors, including in KiwiSaver decisions
• shortcomings in investors’ understanding of products

Mr Everett said that areas which the market should anticipate the FMA to focus on under this priority are practices that encourage churn or switching, including in KiwiSaver and insurance, RFA and AFA conduct and remuneration arrangements including commissions.

Conflicted conduct

In what he described as the second, and connected, priority – Mr Everett referred to conflicted conduct and the risks the FMA see as including:

• distribution models that exacerbate conflicts
• incentives to mis-sell or churn products – including conflicted remuneration arrangements
• the ability of professionals and institutions with regulatory duties to carry them out, including custodians, supervisors, and trustees
• and poor quality disclosure (especially about fees – and about risks too)

He went on to refer to the need for company directors and other insiders to demonstrate that they do not put their own interests, or the interests of others, before the interests of the companies they serve and their shareholders.

Identifying the areas that the market should anticipate the FMA to focus on under this priority, Mr Everett singled out:

• distribution models that lead to conflicted advice and that could also lead to mis-selling
• fee-driven conduct that leads to lesser-quality outcomes for investors
• and ensuring systems that provide the proper custody of assets


In the third priority area, that of governance and the setting and driving of culture and conduct within organisations, the speech identified the risks to include:

• the skills and competencies of directors in ensuring firms meet regulatory obligations
• ensuring governance, including key processes and data, that is geared to providing reassurance about conduct
• integrated ‘make, manage, and distribute’ structures
• and the FMA’s ability to ensure firms and professionals understand what their obligations are.

He continued by adding that the areas of focus for the FMA under this priority are engaging with directors so they understand the FMA’s expectations, and also a focus on quality governance arrangements in funds and in firms.

As well as the recent guidance note on governance under Part 4 of the FMC Act, Mr Everett said that, for directors and senior management, the FMA will shortly publish on governance. This will take the form of a revised set of governance principles that reflects the experience of the last few years, drawing on experience here and overseas, and recent case law and statute.

Further information

This outline of enforcement priorities, when coupled with the extensive detail contained in the (draft) Phase Two FMC Regulations, released at the end of September, and containing 600+ pages of guidance on the process of transitioning from the Securities Act to the FMC Act, along with the further guidance to come in the area of governance, help flesh out the market’s understanding of the brave new world to commence when the FMC Act begins to come fully into force from 1 December.

If you would like more information about any of the matters discussed in this note, please contact me.

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