COMPLIANCE NEWS – INSURERS
DECEMBER ISSUE | 2020
This month we look at Reserve Bank consultation documents for the Insurance (Prudential Supervision) Act 2010 and the Insurance Solvency Standards, standard conditions for financial advice provider licences, and the commencement of the Privacy Act 2020.
We also provide our general update on relevant legislation, and wish all our subscribers our very best for the festive season. This will be our last Bulletin for 2020, and will resume again in February 2021.
RESERVE BANK ISSUES INSURANCE CONSULTATION DOCUMENTS
In October this year we reported on the Reserve Bank of New Zealand’s (Reserve Bank) announcement that it will relaunch its reviews of the Insurance (Prudential Supervision) Act 2010 (IPSA) and the Insurance Solvency Standards (ISS). On 30 November 2020, the Reserve Bank released consultation papers for both reviews.
The IPSA review consultation paper considers the scope of the IPSA and the treatment of overseas insurers. The Reserve Bank also released a non-technical summary of the consultation paper that provides context for the review and outlines the issues for consultation. In particular, the ISS consultation covers:
the scope of the IPSA (the definition of “contract of insurance” and “carries on insurance business in New Zealand”);
- the regulation of overseas insures with branches in New Zealand;
- the regulatory treatment of reinsurance;
- the Reserve Bank’s powers to supervise corporate groups; and
- how insurance companies manage outsourcing relationships.
The ISS review consultation paper considers the structure of solvency standards and IFRS17. The Reserve Bank also released a non-technical summary of the consultation paper that provides context for the review and outlines the issues for consultation. In particular, the ISS consultation covers:
- whether the ISS should contain a purpose statement (the proposed statement is: “The purpose of solvency capital is to ensure that, in adversity, an insurer’s obligations to policyholders will continue to be met as they fall due.”);
- the extent to which the Reserve Bank can request insurers alter their accounts when calculating solvency capital (IFRS17);
- whether the Reserve Bank should take a tiered approach to intervening in insurance businesses facing solvency issues and how that tiered approach could be structured; and
- when the Reserve Bank should be looking at business groups as a whole rather than individual components of a business (“pooling” and offsetting losses).
The Reserve Bank is accepting submissions on both consultations until 5pm Thursday 18 February 2021. It is also hosting a webinar to discuss the consultations on Monday 14 December 2020. Those who are interested in participating in the webinar should express their interest to the Reserve Bank by email.
Please contact us if you have any questions about the Reserve Bank’s review of the IPSA and the ISS.
STANDARD CONDITIONS FOR FINANCIAL ADVICE LICENCES RELEASED
The Financial Markets Authority (FMA) has released finalised standard conditions for full financial advice provider (FAP) licences. The finalised standard conditions follow extensive consultation that began in June this year.
The FMA finalised seven out of eight standard conditions proposed, deciding against a standard condition requiring professional indemnity insurance after feedback about cost, benefits, and availability. The FMA also confirmed three classes of FAP, but renamed them to classes 1, 2, and 3.
The seven standard conditions are largely the same as those in the original consultation paper:
- record keeping: Licencees must create in a timely manner and maintain adequate records in relation to their financial advice service. Records must be available for the FMA to inspect at all reasonable times.
- internal complaints process: Licencees must have an internal process for resolving client complaints relating to their financial advice service. Complaints must be dealt with in a fair, timely, and transparent manner and records are to be kept of all complaints.
- regulatory returns: Licencees must provide the FMA with the information it needs to monitor each Licencees’ ongoing capability to effectively perform the financial advice service in accordance with the applicable eligibility criteria and other requirements in the Financial Markets Conduct Act 2013 (FMCA).
- outsourcing: If a licencee outsources a system or process necessary for the provision of their financial advice service they must be satisfied that the provider is capable of performing the service to the standard required to enable them to meet their market service obligations.
- business continuity and technology systems: Licencees must have and maintain a business continuity plan that is appropriate for the scale and scope of their financial advice service. This include ensuring technology systems are secure at all times.
- ongoing requirements: Licencees must at all times continue to satisfy the requirements set out in section 396 and, if application section 400 of the FMCA. The requirements of those sections include:
- directors and senior managers are fit and proper persons.
- the licencee is capable of effectively performing the service.
- registration of the Financial Service Providers Register.
- directors and senior managers are fit and proper persons.
- notification of material changes: Licencees must notify the FMA in writing within 10 working days of implementing any material change to the nature of, or manner in which they provide, their financial advice service.
The full standard conditions are more prescriptive than the above and include substantive explanatory notes. We recommend FAPs read and understand the standard conditions in advance of applying for a full FAP licence after 15 March 2021.
Full FAP licences will also include a condition that the licencee only provide the market services or class of market services to which the licence relates. The FMA may also impose specific conditions on a case-by-case basis.
The release of the finalised standard conditions for full FAP licences serves as a timely remind that the new financial advice regime is only four months away. The new regime commences on 15 March 2021. From that date, FAPs must have a transitional licence in order to continue operating. We recommend financial advisers who have not yet applied for a transitional licence do so now.
Please contact us if you have any questions about the new financial advice regime.
NEW PRIVACY ACT COMMENCES
The Privacy Act 2020 (Act) commenced on 1 December 2020, replacing the old Privacy Act 1993. The new Act represents a general update of privacy legislation and includes mandatory notification of privacy breaches.
Agencies should already be familiar with the Act and its changes. Most importantly, agencies should already have in place practices and procedures for notifying privacy breaches to the Privacy Commissioner. Failure to report notifiable privacy breaches carries a fine of up to NZD10,000.
A privacy breach is notifiable if it is reasonable to believe that the privacy breach has caused or is likely to cause serious harm to an affected individual or individuals. “Serious harm” is not defined in the Act, but section 113 requires agencies to consider the following factors:
- any action taken by the agency to reduce the risk of harm following the breach.
- whether the personal information is sensitive in nature.
- the nature of the harm that may be caused to affected individuals.
- the person or body that has obtained or may obtain personal information as a result of the breach (if known).
- whether the personal information is protected by a security measure.
- any other relevant matters.
Determining whether or not a privacy breach has caused or is likely to cause “serious harm” is therefore going to be a judgement call for agencies. Agencies’ privacy policies should include strong record-keeping requirements in relation to privacy breaches.
Other new changes in the Act include:
- compliance notices. The Privacy Commissioner can now issue compliance notices to agencies requiring them to do or stop doing something to comply with the Act.
- enforceable access directors. Alongside compliance notices, the Privacy Commissioner can now direct agencies to provide individuals with access to their personal information.
- overseas effect. The new Act applies to any agency “carrying on business in New Zealand”, whether they are based here or offshore.
Please contact us if you have any questions about the new Privacy Act.
New Zealand’s held its general election on 17 October 2020. There has been no legislative progress since 11 August 2020.
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. The Governance and Administration Select Committee is now accepting submissions on the Bill.
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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