Bank and insurance licensing law change doesn't go far enough, Consumer says

Financial institutions and their intermediaries are to be regulated for conduct under a law change. Photo / file

A proposed law change set to license and regulate the conduct of banks, insurers, non-bank deposit-takers and those who sell their products doesn't go far enough New Zealand's consumer watchdog says.

But banking and insurance industry bodies say the legislation is being rushed and should be delayed so more details can be worked out.

Submissions to Parliament's finance and expenditure committee are due to be heard on Wednesday for the Financial Markets (Conduct of Institutions) Amendment Bill.

The bill aims to plug gaps exposed by conduct and culture reviews of banks and insurers undertaken by the Reserve Bank and Financial Markets Authority in the wake of Australia's Royal Commission into misconduct in the financial sector.

While there was no evidence of widespread issues in New Zealand's financial sector, there were pockets of concern that prompted regulators to make recommendations for change.

The bill aims to see financial institutions to get a license from the FMA which would require them to treat consumers fairly and prohibit incentives based on volume or value sales targets.

Banks have already moved to ban frontline sales incentives while insurers have removed perks such as free trips based on volume sales but have refused to budge on high upfront commissions paid to advisers for selling life insurance.

In its submission Consumer New Zealand advocate Aneleise Gawn said regulations to prohibit volume or value sales targets would improve the status quo but it didn't consider the changes to be adequate to bring the desired shift in the industry.

"We remain concerned about the potential harm to consumers from sales incentives used
to remunerate staff and sales representatives in the industry."

Gawn said it was concerned about conflicted remuneration and the fact financial institutions would still be able to offer remuneration and incentives not linked to sales volume or value.

It also wants financial institutions to have to report publicly on specific performance measures such as the average pricing of home loans that mortgage brokers obtain on behalf of home buyers, the average pricing of home loans provided by lending according to distribution channel and the distribution of loans by brokers between lenders.

"Disclosure of this type of data is essential to ensure the regulator is able to effectively
monitor the market and outcomes for consumers."

In particular Gawn pointed to its concerns about the sale of AMP's life insurance business to Bermuda-based company Resolution Life which includes around 200,000 New Zealand policy holders.

The deal has already been reworked once after the Reserve Bank failed to give its blessing but AMP is hoping to get regulatory approval for its second attempt by the end of this month.

Gawn said while the bill would provide policy holders with some assurances the offshore company would be required to meet the "fair treatment" standard it was concerned there were not enough protections in place to ensure policy holder rights were not compromised.

"If the sale goes ahead, the protections in the bill could take several years to come into
effect and would leave consumers vulnerable in the interim.

"We encourage the Committee to consider what further protections are required in the bill
to ensure policyholders are protected and the sales process is transparent."

Bank says new legislation is being rushed through. Photo / file.

But the banking industry wants the bill either slowed down or referred back to officials for further development.

In its submission the New Zealand Bankers Association's deputy chief executive and general counsel Antony Buick-Constable said while it supported the underpinning policy goal of the bill - to treat consumers fairly through the lifecycle of financial products - the bill itself needed significant refinement to ensure a clear framework was developed.

"This is important not just for financial institutions and intermediaries, but also for the Financial Markets Authority (FMA) and consumers."

Buick-Constable said currently the scope of some of the obligations and to whom they applied was unclear.

He said the details of the bill should be worked out now rather than waiting until the regulation stage.

"The implementation of a new conduct regime in New Zealand is an important development. It is critical to allow the time to ensure that the legislation and
regulations are workable and proportionately address the identified issues, and that
financial institutions and their intermediaries have sufficient time to ensure
compliance with whatever is set as the final regime."

"Given the additional work required, NZBA suggests that this may be a Bill that the
Committee could recommend be moved to a slower track and/or not proceed at this
stage but be referred back to officials for further development."

Anthony Buick-Constable, deputy chief executive of the New Zealand Bankers' Association. Photo / Supplied

Richard Klipin, chief executive of the Financial Services Council, which represents the life insurance industry, also expressed his concerns about the bill in its submission.

"We understand the significant time constraints imposed during the preparation of this Bill. Despite good intent, there is widespread concern amongst our members regarding the haste at which this bill is being rushed through Parliament."

Klipin said the bill had not been well though through and sufficiently consulted on and a number of important aspects lacked detail and clarity.

There were also some areas where it duplicated or potentially conflicted with existing legislation.

"We are concerned that there are now many existing licensing regimes in the industry and creating yet another one is disruptive and costly. The objectives of a conduct licensing regime could leverage off the existing regulation delivering the same result with less complexity."