Clark David; Dean JacquiHon Dr DAVID CLARK (Minister of Commerce and Consumer Affairs): Thank you Mr Chair. I'm pleased to open proceedings on the Financial Markets (Conduct of Institutions) Amendment Bill. The bill represents a fundamental evolution of the regulation of the retail banking and insurance sectors. It introduces a conduct licensing regime for financial institutions such as banks insurers and non-bank deposit takers to ensure they treat customers fairly. This bill is the final piece of the Government's response to misconduct issues in the banking and insurance sectors. Before we get into the details I do want to thank the Finance and Expenditure Committee for its consideration of the bill. I also want to thank all who made written and oral submissions through the select committee process and beyond. Several reviews were held in 2017 and 2018 which examined the conduct of New Zealand's financial institutions. These included reviews by the International Monetary Fund the Financial Markets Authority (FMA) the Ministry of Business Innovation and Employment and the Reserve Bank. These reviews identified significant weaknesses in the conduct and culture of institutions in New Zealand's financial sector. If these risks were left unaddressed it would result in significant harm to consumers and therefore also damage confidence in New Zealand's financial services. Our recent experience with COVID has further highlighted why this regime is needed. COVID has resulted in enormous pressures being felt by financial services businesses and by consumers. While I acknowledge the steps the sector has taken to support consumers through difficult times these measures that they've taken are entirely voluntary for that period of time and they rely on goodwill. Many of these positive measures are likely to expire while consumers' ongoing needs will continue. That shows the importance of financial institutions having the capacity and incentive to always address the changing interests and needs of consumers particularly those who find themselves in vulnerable circumstances. The bill I'm presenting today will create a regime that governs the conduct of key financial institutions to address the risks and gaps that we have identified through those reviews. The ultimate intention of this new regime is for financial institutions to better serve the interests of consumers improving trust and confidence in the financial sector. With all of that comes an improvement in consumers' wellbeing—financial wellbeing first and foremost in this regime but that has a knock-on impact of course. This regime will apply to banks insurers and non-bank deposit takers. There has been much discussion about the scope of the regime. The scope has been deliberately set to capture those areas where there is the clearest and greatest evidence of harm. The evidence gathered through previous reviews found that this risk lay with banks life insurers and general insurers. On the one hand I've received feedback that the scope of the bill is too narrow and that it should be expanded to include all financial service providers. I acknowledge that some financial service providers like finance companies will be subject to a different level of regulation. However these entities and the products that they offer are already subject to regulation such as the responsible lending obligations under the Credit Contracts and Consumer Finance Act and product-specific obligations under the Financial Markets Conduct Act. The scope of the regime can be extended in future though if it's deemed to be needed to achieve the purposes of the Act—if we identify any gaps that need to be addressed. So on the one hand I've received that feedback that the scope of the bill is too narrow; on the other hand I've also received feedback that the scope of the bill is too broad and that non-bank deposit takers—such as credit unions—should be excluded from the regime. However it is my view and the Government's view that non-bank deposit takers offer a wide range of bank-like services to consumers and face similar governance and conduct risks. Therefore my view is that they should remain subject to the bill. Their inclusion in the regime is also consistent with the Government's June 2019 decision to bring prudential regulation of banks and non-bank deposit takers within a single deposit taker regime. So the bill—what does it do? It establishes a new regulatory regime for the conduct of financial institutions. That regime will give consumers confidence that the financial institutions meet appropriate standards of conduct by requiring financial institutions to be licensed by the Financial Markets Authority. The bill also gives the FMA—the Financial Markets Authority—a range of tools to supervise monitor and enforce the new conduct regime. Strong civil pecuniary penalties can be imposed if a financial institution or intermediary contravenes an obligation in the bill bringing New Zealand with that in line with overseas jurisdictions. Fairness is essential in building trust in the financial sector which is why the bill seeks to ensure consumers are treated fairly by their financial institutions. The bill introduces a fair conduct principle. It also requires financial institutions to establish implement and maintain an effective fair conduct programme. This means financial institutions must turn the fair conduct principle into concrete policies processes systems and controls to make sure that they are considering consumers' interests as a part of their regular business and make sure that they are treating them fairly. Now I want to say something about sales incentives and the Government's Supplementary Order Paper before I close. Sales incentives can create conflicts between the interests of those who are selling or advising on products and services and the interests of consumers. Those conflicts can cause sellers or advisers to prioritise their own interests over the interests of their customers in the pursuit of a reward. I understand that incentives are an important part of remuneration structures for salespeople and financial advisors. However it's also important that financial institutions turn their minds to the potential risks when designing or managing these incentives. The bill requires therefore financial institutions to have effective systems and controls in place to mitigate or avoid consumer harm from sales incentives. So to the Government Supplementary Order Paper: following feedback from public consultation on two discussion documents I am tabling a Supplementary Order Paper—an SOP as they are commonly known in this House. The amendments in the SOP will make sure the bill works across different types of financial institutions and business models. So as far as intermediaries are concerned the bill—as drafted—included prescriptive requirements on financial institutions to closely train and manage or supervise intermediaries. Industry have raised what I consider to be reasonable concerns that these requirements are too detailed capture too many intermediaries and may overlap with the new regulatory regime for financial advice. So to ensure the bill works across different types of financial institutions and business models I propose the bill take a more principles-based approach rather than prescribing requirements in detail. This will ensure the new regime enables financial institutions to design processes which best fit their own business models while still upholding a high standard of conduct. The SOP also makes other amendments to the bill to ensure the Lloyd's insurance market for example is treated similarly to other insurance providers and to ensure that financial institutions take into account the potential for consumers to be in vulnerable circumstances. Finally before I close the bill provides for regulations to be made to support the regime. A big gap currently is the lack of regulation regarding sales incentives based on volume or value targets such as overseas trips as a reward for selling a certain amount of insurance policies. These kinds of incentives create a strong conflict of interest particularly as a person nears their sales target. Accordingly the bill enables the making of regulations to prohibit the offering and use of these incentives. These will be developed after the bill has passed. Otherwise I do not propose to make further supporting regulations at this time. The FMA will work with industry to ensure that the expectations on financial institutions are clear including by issuing guidance where appropriate. Further regulations can always be made in the future if it becomes apparent that more prescription is needed to achieve the desired outcomes of the regime.So in closing the bill completes the Government's response to misconduct issues in the banking and insurance sectors and sets in place an important regime to ensure consumers are treated fairly when they deal with financial institutions. Once the bill's passed the FMA will work with financial institutions to ensure they're prepared for the new regime and for licensing applications to open in mid-2023. The intention is that the regime commence in early 2025. I'm very much looking forward to the discussion at the committee stage of this debate but hope that those opening comments may provide some guidance as to why we've taken the steps with the SOP and why we have continued to operate with the scope such as it is.CHAIRPERSON (Hon Jacqui Dean): Members the time has come for me to leave the Chair for the dinner break. The House will resume at 7 p.m.Sitting suspended from 6.01 p.m. to 7 p.m.