"We will soon introduce new legislation to parliament which will require banks, insurers and other financial service providers to put systems in place to make sure they treat their customers fairly."
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 says.
"Removing these types of incentives will provide better protections for consumers from misconduct."
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 systems and processes, as well as suspend or vary the conditions of a license, Faafoi says.
"Financial institutions will face strong financial penalties for breaching their obligations under the regime," he says.
"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."
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 up to a $1 million fine for individuals and up to $5 million for other entities.
The announced was welcomed by the banking and insurance sector although that was with some caveats from the insurers.
Tim Grafton, chief executive of the Insurance Council of New Zealand which covers general insurers, said it was generally supportive of the proposed changes to legislation.
"The changes come at a time when it's clear some parts of the financial services sector are not meeting the conduct standards expected.
"General insurers support legislative changes to achieve this and are looking forward to seeing the detail of the legislation when it is released."
Grafton said the legislation on sales incentives would address the first-move disadvantage that insurer struggle with.
However he notes 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 their insureds 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 scope of the measures were comprehensive and aligned closely with its industry-led work.
"The focus of the new regime on licensing, expanding the FMA's remit, and ensuring remuneration practices serve good and fair client outcomes is entirely appropriate."
But he said the industry now needed to see the detail behind the proposals.
"We look forward to engaging further with the Government on the detail of them as part of our commitment to driving better consumer outcomes across the sector", Klipin said.
Roger Beaumont, chief executive of the New Zealand Bankers' Association said it would work closely with the government and regulators to develop and implement the new requirements.
"Since last year's Bank Conduct and Culture Review all banks have committed to removing sales incentives for frontline salespeople and their managers.
"While that review found no evidence of widespread misconduct and culture issues across the industry here we accept there's work to do to put better systems and processes in place to ensure good customer outcomes. We're working hard to do that."
He said the banking industry understood the high standards expected by customers and was prepared to meet those standards.
"We look forward to working with officials to ensure the legislation is practical and achieves its objectives," said Beaumont.
Financial Advice New Zealand chief executive Katrina Shanks said consumers were the big winners from the Government's announcement.
"Creating a licensing regime for banks, insurers, and non-bank deposit-takers and requiring them to meet a fair treatment standard with regards to customers is a good move.
"The aim of the Code of Professional Conduct for Financial Advice Services is to make sure customers are treated fairly. Aligning financial institutions to a similar standard should ensure a consistent approach for the life cycle of a product, from design to claim.
"We agree in principle with the creation of obligations for financial institutions around how they design their remuneration and any sales incentives, and how they manage the risks those incentives create. All stakeholders must ensure people can access quality advice and that includes a remuneration system that allows a range of sustainable financial advice business models.
"Removing sales targets and incentives is a good idea because we recognise that from time to time this has sent incorrect messaging to those providing advice. We will be interested in seeing more detail in this area.
- BusinessDesk
