Prickly CoFI legislation to be kept but reformed
The government is doing an about turn on the contentious Conduct of Financial Institutions (CoFI) legislation.
Wednesday, January 31st 2024, 8:30AM 
3 Comments
After saying, during October’s election campaign, that the legislation would be scrapped, Commerce and Consumer Affairs Minister Andrew Bayly now says it will not be discarded but undergo a targeted review to ensure good conduct obligations are proportionate and fit-for-purpose.
In a speech to the Financial Services Council, Bayly said the review will include reinforcing the principle that businesses applying for a licence under CoFI have the responsibility for determining what is an appropriate fair conduct programme for their specific needs – in essence a proportionate approach.
The review will also require the FMA to issue clear guidance for smaller institutions to meet minimum requirements of conduct.
To put the FMA requirements into context, Bayly says it is essential all financial institutions have in place fair conduct programmes that cover how they engage appropriately with their clients and customers; develop new policies and products to be fit for purpose and meet regulatory requirements; establish transparent fee structures and charging arrangements with intermediaries; and, develop an adequate complaints processes.
“Whilst a fair conduct programme might look different for a credit union with 200 customers compared to a bank with two million customers, the importance of fair treatment remains the same.
“These changes are not about lessening requirements for appropriate conduct. It's about ensuring that financial institutions have clear guidance from the FMA, and take responsibility to meet their obligations more effectively without compromising on conduct standards.”
In a change to the architecture of financial institutions regulation, Bayly will separate regulation and conduct. The Reserve Bank will be the prudential regulator and the FMA the conduct regulator.
The FMA will issue a single licence covering conduct issues for financial institutions, while also clearly defining obligations within the Financial Markets Conduct Act, meaning easier reference for growing or contracting financial institutions.
And duplication will be removed in areas of initial fit-and-proper person assessments required by both the FMA and RBNZ but both entities will have to report separately on cyber resilience.
This has come because of the introduction of CoFI and yet another licence requirement, imposing substantial additional compliance costs on financial institutions in documenting their fair conduct programmes.
“It is not sufficiently focused on taking a proportionate approach and has exacerbated the situation where some businesses are regulated by three different institutions and have to hold multiple licences from the FMA and the RBNZ, adding to their operational burden.
For instance a large, diversified financial institution may have to apply for up to five licences from the FMA (such as Financial Advice Provider, Discretionary Investment Management, Managed Investment Schemes).
“Previous governments across sides of the house added layers of regulation and legislation aimed at enhancing conduct by financial institutions, but instead it led to a loss of coherence and clarity. Many of the changes were well intentioned but to some extent, failed to deliver optimal outcomes for Kiwis and businesses,” Bayly says.
He intends to reinforce the model with better coordination and cooperation between regulators. A timeline will be made and transitional arrangements put in place to avoid any issues of uncertainty, which is likely to include ‘grandfathering' into any new licence regime where institutions already hold a licence.
Pointless piece of bureaucracy
The decision to reform CoFI instead of scrapping it doesn’t wash with Squirrel Mortgages chief executive David Cunningham.
“CoFI was a solution looking for a problem. It is entirely political instead of a practical solution that will make any meaningful difference.“
Cunningham says he has always been sceptical of CoFI and a review changes nothing. “It's just a pointless bit of bureaucracy which will add nothing. In my opinion, it is a total waste of space, considering the FMA already has trading expectations of fair conduct.
“The principles based legislation is sound and the market determines what is fair with guidance from the FMA. The FMA is good at issuing guidance on how they view and interpret fair conduct.
“How 99% of banks and insurance companies operate, by far the biggest financial institutions in New Zealand, is fair and sound. Keeping CoFI is disappointing. It should have had a pen put through it.”
However, he concedes CoFI is so far down the track that most institutions are part way to getting ready for it for its introduction by March next year.
Cunningham says the move to separate the regulators makes sense. “It is sound to have the Reserve Bank focused on prudential supervision in terms of the safety of the financial system, and the FMA focused on the conduct and the sort of operating guidelines for how financial institutions and intermediaries operate.”
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Comments from our readers
Also most detractors of CoFI have a direct vested interest in providers not being accountable.
Principals based legislation is sound for advisers, why is it not sound for providers?
We don’t have any legislation in this space for providers, meaning that between getting their life insurance license and the FMCA there’s nothing stopping them doing things that are not client centric and aligned with the principals approach of FSLAA.
Sure competition can help, as Amused points out, but that doesn’t help life and medical clients stuck with providers working against them.
Granted most of the need for CoFI sits with the life and medical insurance markets, because they are markets that have long term contract requirements that more often get worse not better for the client moving providers.
All other financial products typically have much shorter term options and choices available that are more easily accessed. Thus competition can have a significant impact on driving provider activities in these areas.
Again, CoFI is not the silver bullet to keep corporates acting responsibly and improving their products to benefit consumers. More competition is.
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That fact that CoFI is so far down the track now that most institutions are part of the way to getting ready for its introduction next year shouldn’t be used as a justification and doesn’t also change the fact that the legislation is unnecessary and will only end up adding additional costs to consumers. Banks and insurance companies will ultimately pass along these costs to their customers in the form of higher interest rates and insurance premiums. The key beneficiary of CoFI will be the Wellington bureaucrats employed by the taxpayer to administer it.
CoFI is not the silver bullet to keep banks and insurance companies acting responsibly. More competition is. The biggest obstacle to more competition is regulation. The primary cost of a restriction on competition is that it reduces the incentives for businesses to act in ways that benefit consumers. Regulations that impose compliance costs on businesses can prevent businesses from taking up opportunities, reducing competition in the market.