Finance firms to face penalties of up to $5m for conduct breaches

Banks, insurers and non-bank deposit takers could face fines of up to $5 million for serious conduct breaches under a new regime announced by the Government.

Commerce and Consumer Affairs Minister Kris Faafoi says customers can expect fairer treatment under a new conduct licensing regime from financial services providers.

“We are aiming to ban things like target-based sales incentives which put profits ahead of people, as has been identified in recent reviews,” said Faafoi.

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 add-on 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,” Faafoi said.

The new regime will be backed by strong enforcement tools, including giving the FMA the ability to direct licensed institutions to change behaviour or improve their systems and processes, as well as suspending or varying the conditions of a licence, Faafoi said.

We are aiming to ban things like target based sales incentives which put profits ahead of people. Kris Faafoi (right)

A spokesman for Faafoi said the penalties for breaches of the regulations would be up to the greater of: the relevant transaction or three times the gain made or loss avoided, or a fine of up to $1 million for individuals and up to $5m for other entities.

This was welcomed by the banking and insurance sector, but with some caveats from the insurers.

Tim Grafton, chief executive of the Insurance Council of New Zealand, which covers general insurers, said it generally supported the proposed changes to legislation.

However, he noted that there would still be impediments to insurers’ ability to be responsible for understanding customers’ needs are met when brokers’ contracts often prohibit insurers from contacting the insured people except via the broker.

“It will be important that there is clarity around the overlapping regulatory regimes and that sufficient time is allowed for a smooth transition that minimises regulatory costs.”

Richard Klipin, chief executive of the Financial Services Council, which represents life insurers, said the measures were comprehensive and aligned closely with its industry-led work.

But he said the industry now needed to see the detail behind the proposals.

Roger Beaumont, chief executive of the Bankers’ Association, said it would work closely with the government and regulators to develop and implement the new requirements.

He said the banking industry understood the high standards expected by customers and was prepared to meet those standards.