Changes to Consumer Rights in Banking
Potential fast-track changes to banking culture and conduct
Following a review by the Reserve Bank and the Financial Markets Authority of New Zealand’s banking culture and conduct, the Ministry of Business Innovation and Enterprise (MBIE) has released a discussion paper setting out the various practical ways it proposes to facilitate change in the financial sector (Options Paper).
The Options Paper proposes imposing specific duties on banks to consider the needs of customers and include not only a general duty to act with care and diligence, but also:
(a) a duty to reasonably consider and prioritise the customer’s interest;
(b) a duty to manage conflicts of interest fairly and transparently;
(c) a duty to ensure complaints handling is fair, timely and transparent; and/or
(d) a requirement to have systems and controls in place that support good conduct and address poor conduct.
These duties would apply to both directors and senior managers, who could become personally liable if their bank or other financial institution fails to meet the duties imposed, unless he/she can make out a defence. Defences include where the director can prove he/she has taken all reasonable and proper steps to ensure that the entity complied with the duty.
MBIE suggests the duties above should apply together, as each duty alone may not be enough to effect the changes sought.
Financial Product Design
The following measures have been proposed in the Options Paper to ensure financial products are designed with customers’ best interests in mind:
(a) a requirement for designers of financial products to identify the intended audience for a product; and
(b) providing the regulator with the ability to stop the distribution of specific products if they have particularly poor customer outcomes. For example, specific insurance policies with particularly poor successful claims rates.
The intention of these measures is to minimise products that are not fit for purpose and which result in “bad” customer outcomes. In the Options Paper, MBIE states a preference for the somewhat more flexible option of giving the regulator (such as the FMA or Reserve Bank) the power to ban or stop the distribution of specific products if they have particularly poor outcomes.
MBIE is also seeking to address concerns that bank employees’ focus on remuneration is at odds with delivering the best outcomes to customers. Various options have been proposed to ensure financial products are distributed in a beneficial way for customers. These include banning target-based remuneration and incentives for banking staff altogether and imposing a duty to design such remuneration and incentives in ways that are likely to promote good customer outcomes.
Tools to ensure compliance
Finally, a broad range of regulatory tools have been proposed in the Options Paper to ensure that the above measures are implemented effectively. These include:
(a) requiring the FMA to monitor and enforce compliance with the new legislation;
(b) introducing strong penalties for non-compliance; and
(c) requiring whistleblowing / reporting procedures to be in place.
To indicate what penalties for non-compliance might look like, MBIE points to the FMC Act which provides that civil pecuniary penalties will be the greater of:
(a) the consideration of the contravening transaction;
(b) three times the amount of the gain made or the loss avoided; or
(c) $1 million for individual contraveners, or $5 million in any other case.
MBIE have acknowledged that the proposed changes may result in heavy compliance costs for banks. In order to strike a fair balance between the interests of customers and financial institutions, NZ regulators have indicated a preference for a duties-based regime to maximise flexibility and to minimise additional costs.
However, we suspect that there will still be substantial push back from banks in opposition to any proposal that will result in substantial costs to them. As such, it may be the more moderate options that are given the go ahead by Parliament when it considers MBIE’s proposals later this year.
ANDERSON CREAGH LAI LIMITED
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