The financial services sector is asking where to now after an expensive layer of compliance preparing for the Conduct of Financial Institutions Act could prove to be a wasted effort

The financial services industry is in limbo after spending millions of dollars preparing for a law that appears to now be heading for the electoral scrapheap. 

Its leaders are expected to seek meetings with incoming government ministers to try to salvage something from a potentially wasted effort. 

At issue is the Conduct of Financial Institutions Act (CoFI). It was introduced to oversee the conduct of banks and insurers by putting a legal obligation on them to make sure they treat customers fairly. CoFI followed probes into the conduct and culture of banks and life insurers by the Reserve Bank and Financial Markets Authority (FMA) in 2018 and 2019, and is scheduled to come into force in March 2025.

CoFI requires registered banks, licensed insurers and licensed non-bank deposit takers to also be licensed by the FMA with regard to their conduct towards consumers. After the law was passed by the outgoing Labour Government, banks and other institutions assigned staff to start developing a Fair Conduct Programme” (FCP), which is required by the law. 

But Pledge 49 of the National Party's economic manifesto vows to repeal CoFI, saying it "makes credit more expensive and harder to obtain, even for basic services such as overdrafts and mortgages."

Following the election results, National is now in a position to lead a government, with ACT and potentially NZ First. If National follows through with its promise to repeal CoFI, it will leave institutions across the finance sector potentially out of pocket because of the work they have already done. Not to mention the time and resource the FMA has applied to preparing for CoFI.

Whilst the big banks can absorb the CoFI compliance costs, it's not so easy for smaller firms. Many of these smaller or alternative lending institutions, as well as finance companies and car lenders, are represented by the Financial Services Federation (FSF).

The FSF's executive director, Lyn McMorran, has repeatedly condemned CoFI as a needless layer of bureaucracy, which duplicates existing rules. But she says it makes sense to try to salvage something from all the effort that has been put in. 

"We have got (the law) now.....it is what it is, the idea of repealing it came out of the blue for us," McMorran says.

"Maybe we could look at reducing the compliance burden, and the compliance cost, rather than throwing everything out when people have already invested so much to be compliant." 

It is unclear how the new Government will respond to a request for talks with the finance sector.  Neither a Minister of Commerce, not any other cabinet minister, has yet been named, nor has the shape of the incoming coalition been determined. 

The shadow Minister of Commerce and Consumer Affairs in the last parliament was Andrew Bayly. He is adamant he can't discuss this matter at all. But speaking before the election, he explained why CoFI had to go - he said good conduct is important, but the regulations that enforce it are too complicated. 

"In some cases, firms are required to have three financial licences, one for the Reserve Bank, one to act as a financial institution and then they need an FMA CoFI licence," Bayly said.

"What we have said is that we would like to simplify obligations around conduct, so it is much clearer who financial institutions are responsible to.   

"That doesn't mean we will relax conduct requirements on financial institutions, we just want to make it simpler."

'Political grandstanding'

No one is adding up the total cost of CoFI compliance across a varied sector, but David Cunningham, who once ran the Co-operative Bank and now heads the mortgage  broker Squirrel, thinks the sum would be large. 

"I havn't seen it, but I know that (banks) work on these things miles in advance, because they take a long time in big organisations."

"So, my expectation would be that banks would have done a huge amount of work on CoFI already. I would not be surprised if National ditches the law and the bigger banks just go ahead and publish anyway," Cunningham says.

Cunningham says the sentiments of the law are fine, but he joins McMorran in condemning it as a waste of time.

"CoFI was unnecessary because it was already covered in other legislation, so it was political grandstanding in my opinion.....it was going to make diddly squat difference." 

The amount of work already done complying with CoFI is not just a problem for the finance industry. The FMA has also done a lot of work which could turn out to be unnecessary. Like finance companies, the FMA will have used up resources to enforce a law that might soon no longer exist.   

There is no response from the FMA on any of this. The FMA will never comment on electoral arguments between competing political parties. But in August, Clare Bolingford, the FMA's Executive Director of Regulatory Delivery, defended the principles and effect of the CoFI law in a speech to a conference of the Financial Services Council (FSC).  

She reminded her audience that CoFI grew out of the conduct and culture review of banks and life insurers. 

"The issues we uncovered in those reviews were not evidence of systemic misconduct and harm," Bolingford said.

"But our conclusions were sound......that banks and insurers had poor conduct risk management and weak systems and processes for identifying and managing poor customer outcomes."

And Bolingford reminded her audience of seven civil proceedings against the finance industry taken by the FMA. One of them led to a penalty of $3.9 million against the insurer Vero.

"With CoFI and the new financial market infrastructure regimes now in place, this brings NZ more closely into line with international jurisdictions," Bolingford said. 

A deathbed reprieve?

No matter what Bolingford thinks, CoFI in its proposed form seems doomed. The National Party explicitly promised its repeal, even though it did not make the party's list of reforms for its first 100 days in office.   

But there seems to be hope in some parts of the finance industry that CoFI might get some sort of deathbed reprieve and be brought back to life in another form. 

The FSC says more needs to be known about details of the incoming Government's plans.

"We need to know exactly what they mean," says its chief executive Richard Klippin. 

The FSC represents fund managers, KiwiSaver providers, insurers and others, and Klippen says he will work closely with the new Government on these changes.   

"The detail is a bit light, so we are not entirely sure what is planned....we are waiting  to see the devil in the detail."