The Financial Markets Authority wants the government to give it the power to "go in and poke around" inside banks and insurers so it can stop potential problems for consumers before they happen, says chief executive Rob Everett.
"At the moment, we have no powers in law to go in and look at these things to allow us and the industry to get ahead of things before they happen," Everett told BusinessDesk.
The FMA has to wait until it discovers specific examples of mis-selling or other types of misconduct before it can act, he says.
The kind of thing the FMA would want to examine include how different banks and insurance companies handle complaints, what systems are in place to manage risk and what governance systems an organisation has in place.
Everett was speaking after the authority and the Reserve Bank released a joint statement on their disappointment with the insurance industry's response to their review of the industry's conduct and culture.
Of the 16 insurance companies involved in the review, some didn't complete the exercise and others didn't provide data on the number of policyholders affected by the issues discovered or the estimated cost of remediation.
Those companies that did complete the review identified at least 75,000 customer issues requiring remediation at the cost of $1.4 million.
But that's in the context of an industry that collects about $2.57 billion a year in premiums from about four million life insurance policies.
Everett says the FMA doesn't have an estimate of how much of a problem there is in New Zealand. But he's sure it's greater than $1.4m.
The government appears receptive to the FMA's plea; Commerce and Consumer Affairs Minister Kris Faafoi says he shares the FMA and RBNZ's concerns about the unwillingness of the life insurance industry to change and that the government has been working to fast-track measures to improve conduct in the financial sector which will be announced shortly.
The New Zealand insurance industry review should also be seen in the context of Australia's royal commission into financial services which uncovered systemic problems such as companies charging fees for services not provided and even charging dead people fees.
Australian banks and insurance companies have been spending huge sums of money to fix the problems uncovered.
Last month, ANZ Bank's group chair, David Gonski, said the bank has "almost 500 specialists focused on remediation and that number is expected to continue to increase."
In May, ANZ said it had spent A$928m ($1.03b) on remediation since the first half of 2017 and that it was working on resolving issues with more than 2.6 million customer accounts.
AMP said last month that it will spend A$300-400m to address legacy issues on top of the more than A$500m in remediation and royal commission costs it booked for calendar 2018.
The FMA and RBNZ have previously said that commissions paid to insurance salespeople in New Zealand amount to about 25 per cent of total premiums paid each year, far higher than in other countries – Mexico and Hungary are the next highest at about 15 per cent with Australia at about 12 per cent and the United States about 9 per cent.
The FMA has also previously said that only 2 per cent of sales of life insurance policies are genuinely new, rather than just churn, or switching customers between policies to generate income for life insurance agents.
Everett acknowledges the FMA's request for more interventionist regulatory powers is a departure from the thrust of financial regulation in New Zealand which leans heavily on disclosure to protect consumers.
"Disclosure's good and it's important, but it only takes you so far and in some cases it's even counter-productive," Everett says.
"There is some research that says if you base your entire regulatory framework on making, in this case, advisors disclose everything it can create a false sense of security in consumers."
While such disclosure should continue, "it's not enough." Either people don't read the huge amounts of disclosure they're provided with or those who do read it then believe they've been told everything they need to know. "I'm afraid that's not always the case."
The FMA and RBNZ have given the companies that didn't produce satisfactory reviews or produce remediation plans until December to do so.
Everett says it isn't appropriate at this stage to name names.
"What we haven't seen as part of the review is any outliers where we would feel it necessary to warn consumers away from these organisations."
Neither has the FMA seen any "outliers that deserve medals."
But further down the track, naming names is something the FMA would consider.
The Reserve Bank has often cited disclosure as one of its "three pillars" of regulation but in June deputy governor Geoff Bascand said in a speech that "markets and self-discipline are vital forces for ensuring firms serve customers and investors effectively. Given diverging incentive structures and information advantages, experience shows that they are not sufficient to protect the public interest and ensure a healthy and dynamic financial system."
While the FMA is the financial markets conduct regulator, RBNZ is the banking and insurance industries' prudential regulator.