Whistleblowing, fees, incentives and disclosure; the FMA tackles the tough stuff as it details its approach to regulating financial service providers

The Government is being more prescriptive in its drive to ensure financial service providers “have the interests of their customers at heart”.

The Financial Markets Authority (FMA) has published a guide for financial service providers on how it will interpret the law and exercise its powers under the Financial Markets Conduct (FMC) Act 2013.

The regulator says it will take a “risk-based approach” by “assessing which providers and what conduct are mostly likely to pose risks to fair, efficient and transparent markets - and harm to investors and consumers”. It will direct its regulatory attention and effort accordingly.

The guide doesn’t replace existing rules. Rather it signals how the FMA will supervise the likes of KiwiSaver providers, fund managers, peer-to-peer lenders, derivative, equity and debt issuers, and auditors from a customer-centric perspective.

FMA Director of Regulation Liam Mason says: “The guide recognises the imbalance of information and expertise between the users of financial products and those making and selling them.”

While the FMA doesn’t see the guide as a checklist, it gives providers an indication of the sorts of questions they should be asking themselves to ensure they’re on the same page as the regulator.

The 39 questions are broken down into five areas - communication, controls and governance systems, culture, capability and conflicts.

They tackle some of the issues financial service providers have been scrutinised for not doing, including using easy to understand language, disclosing fees, ensuring products can be compared with those of other providers, reducing conflicts of interests in the way staff are paid and protecting whistleblowers.

Some of the questions in the guide include:

- Is your disclosure to customers accurate, clear, concise, effective and timely?

- Are your customers paying a reasonable price (including ongoing fees and charges) for your products and services, and how do you demonstrate to your customers – through disclosure and discussion – that the price and the way it is calculated is reasonable? If a fee or charge is payable in the future and the amount is not known at the time of the sale (e.g. with derivatives) have you clearly disclosed how that will be calculated?

- Is the information you have provided about the price of your products and services, sufficiently clear to enable your customers to easily compare your prices with similar products and services offered elsewhere?

- Are you transparent about the costs that will be passed on to customers from – or will become payable by customers to – associated parties, third-party suppliers, or outsourced providers as a result of purchasing a product or service you supply?

- How do you know that the performance (the return or benefit) of your products and services is consistent with good outcomes for customers? In particular, that the return or benefit is appropriate compensation for the risk being faced by the customer?  

- How do you demonstrate that the way leaders and staff are paid supports focus on good customer outcomes?

- How do you know whether your cross-selling strategies, and practices, are appropriate?

- How do you demonstrate that rapid growth is not due to a misalignment of customer need and business strategy – for example, unreasonable pricing; inappropriate communication or market approaches; or inappropriate customer or staff incentives?

- Do you have an appropriate whistleblowing process, and how can you demonstrate its effectiveness?

- Do you have sufficient knowledge of, and insight into, what management is doing, from sources other than management? How do you know that good conduct principles are being put into practice, and that the right people are being held to account?

The FMA points out: “Authorised Financial Advisers have a code of conduct (AFA Code) that they must comply with and which is enforceable under the Financial Adviser Act (FAA). As such it should be emphasised that the guide does not change any aspect of the AFA Code nor is it intended to operate in the same way for broader financial services.”

The regulator will soon publish a guide to specifically help investors and consumers understand what conduct they should expect from their financial services providers.