CoFI a journey of frustration: CEO

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FMA sets out timetable for COFI compliance, praises industry for ‘incredibly constructive’ discussions

Tuesday, August 9th 2022, 7:51AM 2 Comments

by Jenni McManus

MBIE has begun the task of developing regulations to sit alongside the COFI Amendment Act which was passed into law at the end of June.

At a recent conference on financial markets law, the FMA’s director of banking and insurance, Clare Bolingford, revealed that the regulations would cover two key areas: the fees the FMA will charge for licensing applications from financial institutions (insurers, banks and non-bank deposit takers) and the much-flagged rules on incentives and commissions for intermediaries who distribute the institutions’ products.

Bolingford said the rules were likely to ban commissions and incentives based on value and volume “but that doesn’t mean there can’t be other good incentives put in place”.

The industry has already responded to comments from the government that value and volume-based commissions are a thing of the past. During the past year, insurers have phased out the more controversial commissions formerly bestowed on star performers – the offshore conferences, holidays and other luxury experiences.

Bolingford said the FMA is also developing guidance to help intermediaries comply with their COFI obligations, particularly for those who are regulated by the new financial advice regime. This guidance is expected to clarify the responsibilities between intermediaries and financial institutions.

“What is going to be important is that the distribution method is well understood – how responsibilities sit across different parties within it to focus back on the customer.” It was also important that consumers were able to access financial advice, whether from independents or advisers within the institutions themselves, she said.

Licensing under the COFI regime is expected to begin midway through next year and the window will be open for about 18 months.

The regulator’s standard conditions for licensing are already in the market for consultation and Bolingford warns that before applying for a licence, institutions must have finalised their fair conduct programs, but these don’t need to be operational until the COFI regime comes into force, expected to be early in 2025.

The FMA is planning to release an information sheet with more detail on the expectations around fair conduct programs and will also publish a guide next year to help with the online application process.

Bolingford said the regulatory approach to COFI would be “broadly similar” to that used for the financial advice regime.

“We are looking for it to be more focused on the conduct of institutions rather than compliance with the law. That doesn’t mean compliance is not important but applying that alone is not going to be enough. We really want to shift this mindset to be more about [customer] outcomes than the letter of the law.”

It was a “challenging approach”, she said. “We need to ensure we have that sense of responsibility for the customer embedded within the regime.”

The new principles-based approach of COFI will also be challenging for the FMA. 

While the onus is on firms to figure out what works for their businesses rather than slavishly complying with black letter law and make choices about how they will apply their fair conduct programs, Bolingford says the FMA needs to ensure that as the regulator it can accept that different firms will apply different methods. But it will be up to the firms to document their decisions and explain to the FMA how their fair conduct programs will achieve good customer outcomes and how these will be tested.

On industry engagement with the process, Bolingford said she had been “very impressed”, and discussions had been “incredibly constructive” but there was still work to do.

“In ongoing work with institutions, we have found that while there is some misconduct out there that is deliberate - and we have tried to ensure that is stamped out as far as possible and will be a key focus when we start monitoring – misconduct doesn’t have to be deliberate and most of what we’ve seen out there in the marketplace are weaknesses in controls that mean that customers are harmed, albeit unintentionally.”

But despite the good engagement, financial advisers who are also in the final throes of complying with FSLAA licensing regime, are not so happy.

Katrina Shanks, the CEO of Financial Advice New Zealand, told conference attendees that complying with COFI has been “a journey of frustration”.

“Not only did we have our own legislation which has been implemented, we also got scooped up in someone else’s conduct and culture,” she said during a panel discussion. “So, all of a sudden, we had two bits of conduct and culture to comply with.”

Part of the problem was that the advisers Shanks represents had begun preparing for COFI some time ago “to get in front of the legislation”. But the Bill was changed significantly during its passage through the House, particularly around monitoring and supervision.

“So, what we saw in the past year was many financial institutions already pushing controls, additional training, more supervision, more monitoring, more requirements on financial advisers and FAPs to meet what they thought the requirements were going to be.” This included “quite big audits” for some FAPs.

“So, in our sector, we’ve had to do a whole lot more compliance at a time of uncertainty. There’s been a lot of pressure in the pressure cooker, and COFI and the oversight that’s come from financial institutions requiring more right now has been a really tough gig.”

Tags: CoFI

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