(Notes may differ slightly from speech as delivered)
Tēnā koutou, tēnā koutou, tēnā koutou katoa. Ko Samantha Barrass taku ingoa, ko taku mahi ki te mana Tātai Hokohoko, ko te mana whakahaere, Tēnā koutou, tēnā koutou, tēnā tātou katoa
This is my third FSC outlook event. There is, as I’m sure you’ve all now realised, much to cover in thirty minutes. Before I do that, I want to pause, and acknowledge the work of everyone at the FSC, including Rob Flanagan. The work of the FSC, from the Board to its staff, to members whose staff contribute to its committees, is vital in our engagement-led approach.
The Minister this morning set out a clear vision and direction for financial services regulation in New Zealand. Based on my experience across multiple jurisdictions, these changes offer the opportunity to streamline and bring New Zealand up to best of class, learning from what has, and has not worked overseas.
I’m going to build on some of the points the Minister has raised, speak to the importance of the Twin Peaks regime working well, reflect on how a move to outcome focused regulation is rooted in the reasons that I became a regulator and touch on the importance of work to further develop New Zealand’s capital markets.
With the start of a year, there’s an opportunity to look back, as well as look forward. I want to quickly reflect on 2023. It was a year in which the new financial advice regime came into force, our work on CoFI deepened, and our implementation of the climate related disclosure regime came into effect.
I raise these because it shows what can be achieved when the FMA and the industry work closely together. The FMA and the New Zealand financial services sector has, at its best, always been open, engaged, part of a two-way conversation about how we achieve our objectives to ensure the financial sector is working well for all New Zealanders. If we keep that in mind, preserve it, in the year ahead, I think that will serve us well.
The Minister this morning set out proposals to change to how financial services is regulated in New Zealand. The FMA is committed to working with the Government to implement these.
Our view, as an independent regulator, is that using the core principles at the heart of CoFI can result in a simple and streamlined approach for conduct regulation in New Zealand across the piece. The fair conduct principle that sits at the heart of CoFI, that a ‘financial institution must treat consumers fairly’ sets out that the fundamental components of fair conduct are
- Paying due regard to a consumers interests
- Acting ethically, transparently and in good faith
- Assisting customers to make informed decisions
- Ensuring relevant services and associated products meet the requirements and objectives of likely consumers
- Not subjecting consumers to unfair pressure or tactics or undue influence.
Taking this approach to the conduct of all financial services means that an outcomes-based regime can provide flexibility, support innovation and avoid box ticking. It promotes a supervisory relationship that facilitates proactive and proportionate engagement. It also enables us to minimise regulatory burden.
On CoFI, we have already been engaging proactively with the industry in a variety of ways. Additional guidance and engagement will be provided for very small firms to ensure they have everything they need to be successful. It obviously costs more of our resources but makes things less costly and more straightforward for firms. We will be working with both the Government and the sector to do this.
We have heard feedback from some in the sector who believe the FMA will be subjecting firms’ fair conduct programmes to significant scrutiny during the licensing process. I want to be clear that this has never been our intention and has never been a part of our planning. It’s not for us to go through your fair conduct programme line by line. We’re not going to be signing them off. The responsibility for these programmes sits with the Board of the institutions. It is for you to right-size your fair conduct programme or your CoFI application for your business, especially for smaller firms.
The FMA will be flexible and respond to different business models throughout the licensing process and in our supervision and monitoring approach. The FMA has never had a one size fits all approach to its work, taking an approach based on engagement and working with the sector.
Whenever a funding and levy review of the FMA has taken place in the last few years, the sector has been largely clear that it is this approach – of being flexible, engagement-led, that is preferred over a rules-based, enforcement-led approach. Yes, this means greater costs for the FMA – that industry largely pays for – but critically firms benefit from a more efficient regulatory regime.
As you’ve just heard, the Government is considering the best way forward on CCCFA. When New Zealanders talk about their experience of the conduct of financial services, credit is always going to be top of mind. A critical role of financial services is enabling Kiwis’ lives. It’s their ability to borrow money whether to buy a house or make urgent repairs to their car. We can see the sense in having a single over-arching conduct regulator.
We see the value of using the broader regulatory toolbox provided through the Financial Markets Conduct Act to support appropriate regulation of registered banks and non-bank deposit takers and high-interest rate lending by all lenders, particularly those targeted at vulnerable communities.
Aligning credit regulation with an outcomes-based approach and fair conduct rules would provide clear and constructive benefits. It would provide regulatory certainty and efficiency. It would help ease burden while ensuring a range of monitoring, supervisory and enforcement tools to manage poor conduct in the sector. It would also allow expectations to evolve as new technologies, products and business models emerge.
The FMA looks forward to engaging constructively with the planned review in the coming months and is ready to implement any changes the Government may see fit to make.
A key message that industry has regularly given both the FMA, but also other regulators and policy makers, is the need for greater coordination. We have sought to respond to that through the Council of Financial Regulators, providing clarity through the regulatory initiatives calendar and seeking to coordinate agency activities. Bi-lateral engagements have also been significantly strengthened. We are mindful that industry has been through a period of significant regulatory change in recent years while coping with huge external shocks and impacts such as COVID-19 and last year’s weather events.
Noting those events, it’s important to recognise that different independent regulators and policymakers will necessarily consider risks and events through the lens of their separate regulatory objectives. Regulators have already taken steps to try to manage this, while mitigating its burden. Many of you will have experienced the joint calls that the FMA and the RBNZ conducted during these events, and these received positive feedback.
My view is that this cooperation and co-ordination should continue to intensify. Only by doing this, can we seek to manage impost on industry.
As most of you will know over the last couple of months, we’ve been holding sessions in Auckland, Wellington and last week, Christchurch on outcome focused regulation.
Why have we embarked upon this? Why do we think it is important? What are we hearing?
The point of it is to bring about a shared focus on the ‘so what?’ of our collective effort. Yours in the industry and ours as a regulator.
The point is to recognise the risk of not seeing the wood for the trees that arises from more prescriptive, ‘tick box’ approaches to regulation.
It’s a risk I have been concerned about for my entire career in regulation. It’s why I left my exciting career as a monetary macro-economist and moved into regulation in the first place.
The risk of ‘tick box’ regulation is real. It contributes to regulators failing to spot emerging risk, despite their unique cross-sector vantage point. It increases the extent to which regulation can cut across innovation, including changes that improve outcomes for consumers, markets and society. Unfortunately it allows some to design technical compliance models that fail to achieve the consumer and market aims of the regulatory model.
Rules and other regulations are of course a critical part of the framework. These outcomes don’t replace our legislation – they are not new rules. We believe strongly that our legislation supports these outcomes. The law also provides the mechanisms, where they’re needed, for us to enforce the legal obligations that support the outcomes we are seeking.
We don’t need to go back too far to recognise the market failures that have cut across consumer outcomes and clean markets. Just a cursory look at the enforcement action we have taken in the past year, demonstrates the risk posed by those who can’t or won’t deliver fair consumer outcomes or support clean markets.
We made it clear last year that we are alert to any practices by providers that lead to high pressure sales, not just commissions, not just sales-based remuneration. We acted following a review of the classification of wholesale customers. These are good examples of us beginning to consider how outcomes-focused regulation will work in practice. We weren’t simply focused on a narrow range of practices. We were looking at risks to the outcome that ‘consumers can trust providers to act in their interests’
The FMA’s focus on outcomes is in the first instance something for us. It is about our regulatory approach and the judgment we bring to our work as a regulator. It’s about us leaning even further into our engagement-led approach. It is about forward looking supervisory judgement that is risk-based and outcomes-focused.
The consultation is seeking your views on the outcomes that will guide our approach to exercising our regulatory powers and responsibilities. It will be risks to these outcomes that first and foremost guide our decision-making on how we use our resources. For our supervisory approach, we will use these outcomes, not detailed compliance requirements, to frame our discussions with and assessments of providers.
While I’ve set out some examples of us beginning to think about outcomes, I’ve been clear this is a profound shift for us as an independent regulator, and it will not happen overnight.
As a part of our preparation, we will first look to pilot approaches this year with a small number of firms. Participation will be entirely voluntary. If you are interested in helping inform our approach let us know, particularly in your responses to the consultation.
We need to instil confidence in the approach, and the best way to do that is by demonstrating it to you, so you experience it. It’s our intention that your engagement with our monitoring teams will begin to see a palpable shift to outcomes rather than rules and compliance with rules. In so doing we want to shift the focus to outcomes for consumers and markets and innovation for firms.
I’d like to close by reflecting on the importance of the work that we can do to develop and deepen capital markets in New Zealand. A few years ago, the FMA, alongside the NZX, co-sponsored the Capital Markets 2029 work that considered further ways New Zealand can both enable businesses to attract capital, but also ensure investors have assets to invest in.
It will be important, not just this year, but in the years ahead, to look not just at the regulatory framework, but how we are ensuring New Zealand firms have access to capital to grow, and that the investments are there to ensure KiwiSaver funds have something to invest in to help grow the New Zealand economy.
KiwiSaver has now grown to near $100 billion and is a significant part of New Zealanders’ assets. The FSC’s Blueprint for Growth poses good questions about how Government, the sector and regulators can work together to grow the financial confidence and wellbeing of New Zealanders, and I commend you for this work.
I do want to finish on a reprise. The FMA and the New Zealand financial services sector, at its best, has always been open, engaged, part of a two-way conversation about how we achieve our objectives to ensure the financial sector is working well for all New Zealanders.
Let’s keep that in mind for 2024, and I suspect it will serve us well.
Thank you for your time.
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