Faafoi KrisFINANCIAL MARKETS (CONDUCT OF INSTITUTIONS) AMENDMENT BILLFirst ReadingHon KRIS FAAFOI (Minister of Commerce and Consumer Affairs): I move That the Financial Markets (Conduct of Institutions) Amendment Bill be now read a first time. I nominate the Finance and Expenditure Committee to consider the bill and to report back by 23 June this year.This bill will create a broad regime governing the conduct of financial institutions such as banks insurers and non-bank deposit takers. The ultimate aim of this new regime is to improve the conduct of financial institutions and to help rebuild trust and confidence in our financial sector. This will serve the needs and interests of everyday consumers and lift wellbeing across the board. This is particularly important and timely given the problems that have been occurring in the financial sector and the various reviews that have taken place which led to the introduction of this bill. There have been several recent reviews into the conduct of financial institutions including the 2018 royal commission into financial services and the reviews into banks and life insurers in New Zealand undertaken by the Financial Markets Authority (FMA) and the Reserve Bank. These reviews showed that there are extensive weaknesses in the conduct and culture of institutions in New Zealand's financial sectors particularly in respect of governance and management of conduct risks and lack of focus on outcomes for customers. The reviews also highlighted a gap in New Zealand's regulatory settings in that there is currently no explicit legislative mandate for the regulation of the general conduct of financial institutions. Some of the examples that were heard either in the consultation that was held by the agency or the investigation by the Reserve Bank and the FMA were numerous. In one example a 25-year-old with no dependents was sold a life insurance policy by his bank when he signed up for KiwiSaver. The bank essentially led him to believe that buying the life insurance was required as part of joining KiwiSaver. I've also heard about a person with tetraplegia who was sold a life insurance with a clause excluding tetraplegia which made the cover essentially meaningless.Financial institutions and the products and services that they provide are an essential part of a well-functioning society. Financial products and services are a critical part of our everyday lives as well as our long-term wellbeing. They enable us to save for the things that we want to borrow for a house or to cover ourselves against an unexpected loss. Banking and insurance in particular play an integral role in people's lives. So we've moved swiftly to fast track measures in these areas to protect consumers and to maintain confidence. It is vital that New Zealanders can trust their banks and insurers and be treated fairly by them. Treating consumers fairly is essential to building trust in the finance sector. It will be a win-win for consumers and the financial sector if we can all have more confidence that banks and insurers are placing fair treatment of consumers at the heart of their businesses that financial products are being designed and sold with a view to best meeting consumers' needs and that consumers don't face unreasonable pressure to retain or to change products that may no longer be useful for their particular situation. The new conduct regime that this bill creates is seeking to help cement this trust. In order to address these problems and in turn build the necessary trust in the industry the bill will implement a package of changes. The bill requires banks insurers and non-bank deposit takers to be licensed by the Financial Markets Authority in respect of their general conduct and licensing gives consumers confidence that licensed entities have been checked and meet the appropriate standards of conduct. Moreover it also establishes an ongoing supervisory relationship between an entity and the regulator. Licensing will provide the FMA with a full range of tools to monitor supervise and enforce the new regime. It's not about having an ambulance at the bottom of a cliff but more about enabling the FMA to work with entities to prevent harm in the first place. This bill also centres on an overarching fair treatment principle. Licensed institutions and their intermediaries must comply with this principle which will require them to treat consumers fairly. Financial institutions will also be required to establish to implement and to maintain an effective fair conduct programme and this requirement is a way for financial institutions to operationalise the fair conduct principle and turn the principle into concrete actions within the entities.The conduct programme will require licensed entities to have policies processes systems and controls in place to ensure they're considering consumers' interests and treating them fairly in all aspects of their business. This requirement reflects that fair treatment of consumers is a broad concept that touches on and goes to the heart of every aspect of business. Our financial institutions as well as their intermediaries will be required to comply with the fair conduct programme. Where more detailed obligations are required regulations can provide more guidance but at its core this is about ensuring institutions think about customers all of the time. This approach allows flexibility too. Rather than the Government or the regulator prescriptively laying out exactly what those concrete actions must be for every licensed institution instead this approach enables each financial institution to determine what policy systems and controls make best sense for their business. Industry may have concerns about overlaps of regulatory requirements such as with the consumer credit legislation and whether this new regime will require businesses to duplicate different compliance activities. The conduct programme requirement allows financial institutions to take a coordinated and a flexible approach to different regulatory requirements. The bill will also create the ability to prescribe regulations relating to incentives which financial institutions and their intermediaries will be required to comply with. These regulations will be the mechanism through which sales incentives based on volume and value targets will be prohibited and this prohibition applies not just to licensed entities but also to all intermediaries throughout the supply chain. It's also about any and all incentives whether monetary such as commissions bonuses or other non-monetary rewards like leader boards or trips abroad. I've taken this approach because conflicted remuneration and incentives are one of the biggest issues driving poor outcomes for consumers in the financial sector. As the Australia royal commission found in almost every case the conduct at issue was driven not only by the relevant entity's pursuit for profit but also an individual's pursuit for gain. This prohibition on target-based incentives will address the fact that targets create an increasingly strong incentive to sell and therefore can encourage the person making the sale to prioritise their own interests over those of the customer. This prohibition still allows people to be remunerated for sales but removes the particularly problematic target-based remuneration. The regime also contains strong civil pecuniary penalties if a financial institution or intermediary contravenes an obligation within the law. Compensation for affected consumers can also be sought by any persons. Officials have recently consulted with financial institutions about how the bill will work in practice and I have heard concerns that industry have raised around certain aspects of the bill; for instance how the framework of the bill works in relation to intermediaries the requirements related to conduct programmes and the timing for implementation of the changes and we will be watching the select committee process very closely. New Zealanders do need to be confident that the financial products and services that they are buying will be appropriate for their circumstances and meet their needs. By introducing this bill to improve conduct in the financial sector we're putting the consumer at the centre and helping banks and insurers to ensure trust and confidence in their industry. We will all benefit from a well-functioning finance sector that's focused on the interests and needs of consumers. So I commend this bill to the House.