Source: New Zealand Government
Morena, Nga Mihi Nui. Good morning. It is fantastic to be with you this morning.
My thanks to the Financial Services Council and Richard Klipin for inviting me to speak. Thank you also to Rob Flannagan for your lovely introduction and for all your long nine years of service, you have done a fantastic job.
I also acknowledge Samantha Barrass from the FMA, and I also want to acknowledge my team from MBIE who have been working with me over the past few months.
The FSC has always been an important voice in the financial services sector. I look forward to continuing to work with you all to help support your mission to improve this sector for all New Zealanders.
As Richard said, I have had a long involvement in coming to many of the conferences over the years, and these are the type of opportunities I really value.
Economic priorities
In terms of economic priorities, our Government is focused on getting the economy back on track. Our 100-point plan on Rebuilding the Economy outlined six economic priorities which will drive us towards that goal. These are:
- Eliminating wasteful spending
- Delivering tax relief
- Cutting red tape
- Building infrastructure for growth
- Boosting productivity, particularly in areas like manufacturing and building and construction, and
- Strengthening trade and investment.
We have already made great progress on these initiatives. 90-day trial periods have been re-enacted. The so called “Fair pay” agreements have been repealed. The Reserve Bank’s dual mandate has been amended to focus only on maintaining price stability – i.e. lowering inflation – to name a few.
There is still much to be done however, including in the financial services sector. There are a number of reforms we will enact to make things easier for businesses. And we have already made a start on some of these.
Background
Today I would like to outline some fundamental changes that relate to the financial services sector. But before doing so, it is useful to reflect on where we have come from.
The seminal work undertaken by the Hon. Simon Power in the fifth National Government created a new framework for the sector. Not only did it address poor conduct, but also resulted in the establishment of the Financial Markets Authority [FMA] in 2011.
Since then, under governments across both sides of the House, there has been a series of legislative and regulatory changes aimed at enhancing conduct by financial institutions.
Regrettably, this layering of regulation and legislation has led to the architecture governing the financial services sector losing some of its coherence and it has certainly led to a lack of clarity for many market participants. Many of the changes were well intentioned but, today, it is also, to some extent, failing to deliver optimal outcomes for Kiwis and businesses.
For instance, an increased complexity is the RBNZ steadily involving itself in conduct issues and the Commerce Commission having prime responsibility for monitoring conduct under the CCCFA.
In some cases, certain entities are regulated by three different institutions. In essence, our ‘twin peaks’ regulatory model has become increasingly complex, imposing costs on firms.
Furthermore, many financial institutions now find themselves holding multiple licenses from both the FMA and the RBNZ, adding to the operational burden. For example, 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).
CoFI reforms
The recent introduction of the Financial Markets (Conduct of Institutions) Amendment Act 2022, commonly known as CoFI, has exacerbated the situation by introducing yet another licence requirement and is imposing substantial compliance costs on financial institutions to documenting their ‘fair conduct programmes.’ My view is that we are not sufficiently focused on taking a proportionate approach in developing fair conduct programmes.
Additionally, the Commerce Commission’s role in monitoring and enforcing consumer credit regulation through the Credit Contracts and Consumer Finance Act [CCCFA] adds further complexity. I see value in consolidating responsibility for financial markets conduct and the CCCFA under a single regulator.
Twin Peaks
I consider the twin peaks regulatory framework, initially implemented in Australia and adopted internationally, as being appropriate. However, I propose reinforcing this model with better coordination and cooperation between regulators.
Specifically, I envision a model where the RBNZ serves as the prudential regulator and the FMA as the conduct regulator. I therefore propose that responsibility for monitoring the conduct in respect of the CCCFA be transferred from the Commerce Commission to the FMA.
To address the duplication issue of licensing requirements between conduct and prudential regimes, I propose to consolidate and simplify existing conduct licensing requirements.
The FMA could 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 financial institutions as they grow and contract their businesses.
Furthermore, I will like to remove duplication in areas of initial fit-and-proper person assessments required by both regulators, and the need to report to both regulators separately on cyber resilience.
Turning to the CoFI requirements, I do not want to discard CoFI, but rather perform a targeted reform to ensure that good conduct obligations are proportionate and fit-for-purpose, acknowledging the positive general framework. This includes two aspects;
- reinforcing the principle that the responsibility for determining what is an appropriate fair conduct programme for their specific business lies with the applicant. This means that liability lies with the directors and management and the board to identify key risks in areas of concern and develop their fair conduct programmes accordingly. In essence, this represents a move to a tailored and proportionate approach; and
- requesting the FMA to issue clear guidance for smaller institutions to meet minimum requirements of conduct.
To put this second aspect into context, I believe it is essential all financial institutions have in place fair conduct programmes that cover the following aspects of their businesses:
- How they engage appropriately with their clients and customers
- How they develop new policies and products to be fit for purpose and meet regulatory requirements
- Establishing transparent fee structures and charging arrangements particularly with intermediaries.
- Development of an adequate complaints processes.
Whilst a fair conduct program might look different for a credit union with two hundred customers compared to a bank with two million customers, the importance of fair treatment remains the same.
Let me be very clear – 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 your obligations more effectively without compromising on conduct standards.
I know Samantha will have more to say on the role of the FMA in ensuring CoFi applications meet minimum standards, and the issue of the responsibility of the financial institutions to determine what is the appropriate fair conduct programme to be put in place.
I realise many of you have already begun preparing fair conduct programs for the introduction of the regime by 31 March 2025. You need to continue to do so.
I intend to ensure that appropriate timelines and transitional arrangements are in place to avoid any issues of uncertainty, which will include ‘grandfathering” of all CoFI licences into a single conduct licence in time.
I hope this provides you with a clear direction of my intended reforms. I aim to make it easier for businesses to operate, and I intend to move quickly to address these issues.
CCCFA reforms
Another of the changes we will be making is reforming the CCCFA (Credit Contracts and Consumer Finance Act).
This comes as a particular priority with its inclusion in our coalition agreement with ACT, to “rewrite the (CCCFA) to protect vulnerable consumers without unnecessarily limiting access to credit”
Changes that have been made since 2019 onwards have led to processing times for lending applications increasing significantly across all loan types. I have also heard that banks estimated six to seven per cent of applicants – who would otherwise have qualified for a mortgage – had to be turned down.
Change is needed to address this. In my view, it is the detailed regulations and the strong liability regime that need to be reformed. Together, these two things have:
- led to overly risk-averse lending decisions
- created unnecessary compliance costs, and
- reduced access to credit for consumers.
The intent, as with CoFI, was not to undermine good conduct requirements, especially for high-cost lenders who can prey on our most vulnerable Kiwis. However, the changes have unfortunately led to a significant decline in both traditional and short-term lending. The result has been that vulnerable borrowers have had to turn to alternative unregulated high-cost sources, the very people the changes were seeking to protect them from. We aim to subject high-cost lenders to adequate regulation surrounding lending practices.
I propose to reform consumer credit legislation to address this. And I propose doing it in a two-staged approach:
First, I will remove prescriptive affordability requirements for lower-risk lending. I expect to do this soon as a matter of priority.
Second, I will undertake a more substantive review of the CCCFA. This will include reviewing its penalty and disclosure regime, and its relationship with COFI.
The specific changes will be announced in the coming months.
Companies Act reforms
The final reform I would like to talk to is a reform of the Companies Act.
The Companies Act is an important piece of legislation. It provides the operating framework for all New Zealand companies, including those in the financial services sector. It has been an important part of the corporate landscape of New Zealand for decades.
But it’s now 30 years old. I think aspects of it are out of date and could be improved. To this end, I’m considering how it might be improved, and how these changes might be progressed. This is an important medium-term project. Rest assured, I will provide more details on this further down the track.
In essence, what we want to do is simplify, modernise, and digitise the Companies Act.
Blueprint for Growth
The reforms I’ve spoken about today – namely restructuring the twin peaks regulatory framework, simplifying license obligations, CoFI, CCCFA and the Companies Act – are my current priorities. But looking ahead, I see a need to address many other issues in this sector as well.
I agree with the Council that there are longer-term issues in New Zealand:
- New Zealanders are not as financially literate as we want them to be
- New Zealanders aren’t always prepared for retirement, and
- Some New Zealanders struggle to access affordable healthcare.
I expect the reforms mentioned today will make some progress toward addressing these longer-term issues. Reducing burdens on all businesses will make it easier for customers to engage with and receive financial services, for one. But there is still much to be done.
Looking further into the future, I am interested in exploring changes to our capital markets settings to help New Zealand businesses and investors thrive. I’m also interested in changing KiwiSaver settings to help New Zealanders save more for their retirement. look forward to discussing this more with you in due course.
I would also like to take a look at the work on insurance contract law so that insurers and policyholders have better certainty about the deals they’re striking. As with the capital markets and KiwiSaver work, this is a future workstream, and more information on this will come at a later date.
Closing
In closing I would like to reiterate that the Government is committed to improving outcomes for all New Zealanders. We need a thriving financial services sector to do that. That’s because for consumers to get the help they need, businesses need to be able to work effectively.
I’m confident that the reforms I’ve announced today will move us closer to that vision. And I believe that New Zealanders will be better off because of them.
The financial services sector has an important part to play in getting our economy back on track. I am confident that you all will continue to play your part, and that we will continue to have a constructive discussion between Government and industry.
Thank you again for having me, and I look forward to speaking with you more. Today is the first of many conversations that we’ll continue to have.
Tena kotou, tena kotou, tena kotou katoa.
