COMPLIANCE NEWS – INSURERS
OCTOBER ISSUE | 2020
This month we look at the resumption of the Reserve Bank’s review of the Insurance (Prudential Supervision) Act 2010 and the Financial Markets Authority’s Supervisions Insights Report.
We also provide our general update on relevant legislation.
INSURANCE (PRUDENTIAL SUPERVISION) ACT 2010 REVIEW RESUMES
The Reserve Bank of New Zealand (Reserve Bank) has announced that it will relaunch the review of the Insurance (Prudential Supervision) Act 2010 (IPSA) this month.
In March this year, the Reserve Bank decided to either delay or slow down most of its regulatory initiatives in light of COVID-19. Work on the review of the IPSA was deferred for an initial period of six months. This followed an earlier suspension of the review in April 2018.
The Reserve Bank has said it will publish a policy paper outlining the resumption of the review early this month. The policy paper will cover objectives, topics, and include an indicative timetable. The Reserve Bank will also release a consultation paper on principles to guide a review of solvency standards.
In a speech given on 14 September 2020, Reserve Bank Deputy Governor and General Manager of Financial Stability Geoff Bascand acknowledged that some administrative features of the IPSA have proven to be difficult to utilise and could be improved. The Deputy Governor noted issues with capital management, stated that the quality of risk management and governance sometimes revealed the need for guidance, and identified solvency standards as an area that might be made more specific. Mr Bascand explained one criticism of the “all or nothing” approach to capital adequacy whereby ratios above 100% are treated as adequate and ratios below 100% are treated as inadequate. The Reserve Bank will consider a more graduated approach, one where staged intervention will be triggered at different capital ratios.
Since the review commenced in 2016, several other reviews and reports have been conducted and published. The resumed review will be informed by the International Monetary Fund’s Financial Sector Assessment Programme Report, the Reserve Bank’s independent review of CBL Insurance Limited in 2019, and the thematic reviews of life insurer conduct and culture and the appointed actuary regime.
The Reserve Bank also intends to issue subsequent consultation papers for various components of the review between 2021 and 2023. Changes will be staggered, beginning with easily introduced operational changes, followed by more significant legislative changes.
The review is estimated to be completed in 2024.
Please contact us if you have any questions about the Reserve Bank’s review of the IPSA or the IPSA generally.
FINANCIAL MARKETS AUTHORITY PUBLISHES SUPERVISION INSIGHTS
The Financial Markets Authority (FMA) released its latest Supervision Insights Report (Report) on 24 September 2020. The Report contains detailed findings from the FMA’s monitoring activity, with both industry-wide findings and sector-specific findings, and particular emphasis on financial advisers.
The FMA’s industry-wide findings are broken down into governance and oversight, conduct and culture, compliance assurance programmes, and compliance and controls. We address the key points in relation to governance and oversight and conduct and culture below.
Governance and oversight
The Report explains that some directors lacked a good understanding of their entity’s obligations, corporate governance, or both. Issues were also identified with board independence. The FMA says boards would benefit from following the principles in the legislation and relevant guidance, particularly in relation to board composition, performance, and risk management.
The FMA also found some entities lacked resources for managing risk and compliance. Responsibilities were not clearly defined, policies were not fit for purpose and not up-to-date, managers lacked adequate knowledge of policies and obligations, and risk and compliance functions were insufficiently resourced. The FMA expects entities to clearly define their risk and compliance responsibilities, allocate adequate resource to risk and compliance, and monitor the effectiveness of those resources.
Conduct and culture
The Report identifies several conduct and culture issues, for example:
- lack of board commitment to prioritisation of customers’ needs;
- no proactive collection or utilisation of customer feedback and insights;
- no policies or procedures to identify and manage vulnerable customers;
- inconsistent approaches to identifying and handling customer complaints; and
- inappropriate sales incentives.
The FMA expects all entities to assess their business against the principles in the FMA Conduct Guide and other guidance and address any issues.
Sector-specific findings for financial advisers
The sector-specific findings for financial advisers are broken down into findings relevant to both Authorised Financial Advisers (AFAs) and Qualifying Financial Entities (QFEs), and findings that are specific to both types of advisers.
AFAs and QFEs
The FMA found that, in respect of Adviser Business Statements (ABSs), some were not being kept up to date, arrangements were not being adhered to, processes were explained in insufficient detail, and some had insufficient processes for review and approval. The FMA acknowledges that ABSs are not required under the new financial advice regime, but expects that they will be properly in place until then.
The FMA found numerous instances of advisers not meeting disclosure requirements. For example:
- providing disclosure only on request;
- failing to make customers aware of the scope of the service, including for a limited service; and
- defective disclosure documents that:
- do not contain all the required information;
- deviate from the prescribed format;
- contain inconsistent and out-of-date information.
- do not contain all the required information;
The FMA expects products and services to be described in a way that customers can understand and use. Information should not be concealed or complicated. The new financial advice regime will come with new disclosure requirements. We detailed these requirements in our July Issue. All financial advisers should ensure their disclosure documents contain the required information, are properly formatted, and that they have adequate disclosure processes and procedures in place.
The Report identifies areas where QFEs’ processes made it difficult for advisers to meet their obligations and deliver suitable advice. For example, processes designed to not provide personalised advice, even where circumstances suggested it, and frontline advisers who lacked a good understanding of what constitutes advice.
The Report also identifies weaknesses in QFEs’ quality assurance (QA) arrangements, such as some advisers not being subject to QA review, QA programmes not being risk-based, and failure to periodically review QA programmes. The FMA expects QFEs to undertake considered QA reviews to obtain a reasonable level of assurance about the quality of their advice. Results of QA reviews should be appropriately communicated to advisers, and QA programmes should be properly resourced and reviewed.
The FMA found multiple of examples of AFAs lacking a structured process to identify and match clients’ needs to specific recommendations, meaning there is a risk that recommendations are unsuitable. The FMA recommends AFAs without such a process consider a fact-find or similar process to identify and record clients’ needs so they can be properly met.
The FMA also found numerous examples of AFAs who were not meeting their record keeping obligations, for example those with no policies or processes for compliance, insufficient evidence to show key processes had been followed, and incomplete and insufficient records of interactions with clients. The FMA expects AFAs to maintain complete and accurate records.
Lastly, the Report explains the FMA came across AFAs with inadequate professional development plans and AFAs that could not provide evidence of having completed training. The FMA expects AFAs to “complete an honest evaluation of their competence, skills, and knowledge”, to develop a plan to address any shortcomings, and to undertake and keep a record of appropriate professional training.
Please contact us if you have any questions about the FMA’s Supervision Insights Report, or the FMA’s regulatory approach generally.
New Zealand’s 52nd Parliament was dissolved on 6 September 2020. Accordingly, there has been no notable progress on relevant legislation this month.
Financial Markets (Conduct of Institutions) Amendment Bill
The Finance and Expenditure Select Committee reported on the Financial Markets (Conduct of Institutions) Amendment Bill on 7 August. The Bill now awaits its second reading.
Insurance (Prompt Settlement of Claims for Uninhabitable Residential Property) Bill
The Insurance (Prompt Settlement of Claims for Uninhabitable Residential Property) Bill had its first reading on 21 July 2020. It will be considered by the Governance and Administration Select Committee. There has been no activity in respect of the Bill since 22 July.
Fair Trading Amendment Bill
The Fair Trading Amendment Bill passed its first reading on 12 February 2020. The Economic Development, Science, and Innovation Committee is considering the Bill. Submissions closed on 26 April 2020. There has been no activity in respect of the Bill since 13 February 2020.
Insurance Contract Law Review
The Ministry of Business, Innovation and Employment is completing a review of New Zealand’s insurance contract law. The purpose of the review is to ensure insurance markets work well and enable individuals and businesses to effectively protect themselves against risk. The Minister of Commerce and Consumer Affairs Hon Kris Faafoi has explained he considers the review a priority.
There has been no visible activity in respect of the review since April 2019.
Disclaimer: The information contained in this newsletter is provided for general purposes only, and should not be construed as legal advice on any matter.
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