CoFI concerns answered as FMA charges ahead with preparations

“Some suggested that the conditions were appropriate to prudential regulation, but not conduct regulation. Some submitters suggested that financial institutions should be exempt from the proposed conditions on the basis that they are regulated by the Reserve Bank.”

In response, the FMA pointed to the “twin peaks” model of regulation in the Kiwi financial markets.

“This means that two regulators – the Financial Markets Authority and the Reserve Bank – both have responsibility for regulating the financial sector,” explained the FMA. “These two agencies represent the ‘twin peaks’ of the regulatory system, each tasked with separate functions. The FMA’s remit is primarily conduct regulation and the Reserve Bank’s remit is prudential regulation.

“Conduct regulation focuses on behaviour of financial markets participants. At its centre is ensuring

consumers are treated fairly and that financial service providers act with integrity. The objective of prudential regulation is financial stability and the promotion of sound and efficient banking and insurance sectors. The difference in remits mean that the FMA and Reserve Bank view financial services providers’ responsibilities and activities through different lenses.”

Meanwhile, during the standard conditions consultation, similar concerns were raised in the area of regulatory returns, with comments pointing to a clamour for a further deep dive into the proposed requirement.

The regulator said: “Multiple submitters provided feedback on the need for the FMA to avoid duplication of reporting requirements and to align returns across those completed for other licences issued by the FMA, such as financial advice provider licences. Some submitters said that the FMA should not seek information which is reported to the Reserve Bank or to other parties.

“We acknowledge this feedback, and confirm that we will take this into consideration when we are developing the regulatory returns for financial institutions. We will undertake consultation on the regulatory returns prior to introducing these. The information that we are likely to seek in regulatory returns will relate to licensees’ financial institution service, which means that it will be information related to conduct.”

The FMA also clarified its position when it comes to outsourcing and how it relates to consumer outcomes oversight. Additionally, it was highlighted that conditions that apply to licences issued by the FMA do not affect or change conditions that apply to each one. Financial institutions, said the regulator, must ensure they comply with all relevant conditions under the separate licences that they hold.

Licensing materials under CoFI

Aside from responding to the consultation comments, the FMA also released a suite of licensing materials for banks, insurers, and non-bank deposit takers ahead of the new regulatory regime coming into force in 2025.

The watchdog, which will begin accepting licence applications from July 25 next year, published the final standard conditions, an information sheet on fair conduct programmes (FCP), as well as a guide to financial institution licence requirements.

Forty (40) pages long, the guide seen by Insurance Business sets out the FMA’s expectations, the necessary policies and processes in place for CoFI, and the eligibility requirements for a financial institution licence. The FCP information sheet, meanwhile, is aimed at helping entities establish, implement, and maintain their respective programmes.

“An FCP means effective policies, processes, systems, and controls that are designed to ensure the financial institution’s compliance with the fair conduct principle,” stated the FMA. “The FCP must be in writing. As an FCP consists of policies, processes, systems, and controls, it could comprise a number of documents rather than being a single document.