Fines in financial services legislation

AUCKLAND: Individuals will face fines of up to $1 million and companies up to $5 million for breaches of a planned new conduct licensing regime for financial services providers.

‘‘We’re sending a pretty clear message,’’ Commerce and Consumer Affairs Minister Kris Faafoi said in announcing the new regime, which will be administered by the Financial Markets Authority.

Mr Faafoi says he has not had the opportunity yet for substantive discussions with the FMA about its new powers but ‘‘I’m sure they will have some feedback for us’’.

The FMA will be given ‘‘a full range of enforcement tools,’’ including the ability to suspend or cancel licences.

The FMA will also require more resources which will be ‘‘not insignificant’’ and that will be decided through the normal budgetary process.

Mr Faafoi said he hoped the legislation establishing the new regime would get its first reading in Parliament before year’s end and that, after going through the normal select committee process, it would be passed into law before next year’s election.

Customers can expect fairer treatment under the new regime for financial services providers, he says.

‘‘In the past, regulators haven’t had any tools to prohibit issues around conduct and culture. This is new territory. This has not been done before,’’ Mr Faafoi told journalists.

‘‘Under this new regime, we are aiming to ban things like targetbased sales incentives which put profits ahead of people, as has been identified in recent reviews.’’

The new regime will be backed by strong enforcement tools, including giving the FMA the ability to direct licensed institutions to change behaviour, improve their IT and other systems and processes.

‘‘By taking action to improve conduct, we’re putting the consumer at the centre and helping banks and insurers to restore confidence in their industry.’’

The new regime is one outcome of the Reserve Bank and FMA’s joint review of both banks and life insurance companies.

Financial institutions will be required to implement ‘‘effective policies, processes, systems and controls to meet the fair treatment standard’’.

They also face obligations in relation to how they design their remuneration and any other sales incentives and how they manage the risks those incentives create.

Soft commissions, such as overseas trips and bonuses based on the volume of sales, will be prohibited.

The institutions will also be accountable for sales to consumers through third parties, such as retailers, car dealers and travel agents and/or airlines, who provide addon finance and/or insurance.

‘‘Incentives such as overseas trips or bonuses for selling a certain amount of insurance policies can lead to sales staff pressuring customers into buying unsuitable products, like policies they can never claim on,’’ Mr Faafoi said.

‘‘Removing these types of incentives will provide better protections for consumers from misconduct.’’

The FMA has identified churn of life insurance policies as a major issue, estimating that only about 2% of new policies are actually new and the remainder are churning from one policy to another.

There is an obvious incentive for insurance sales staff to churn polices because they are paid upfront commissions on new policies.

About four million life insurance premiums are in force, with annual premiums totalling $2.57 billion.

The Reserve Bank has estimated that commissions to sellers in New Zealand amount to about 25% of total premiums paid each year, far higher than in other countries. Mexico and Hungary are the next highest at about 15% and Australia is about 12%. — BusinessDesk