EY Law's Rebecca Sellers says plenty of work is going on to test NZ’s financial services regulation is meeting international best practice, but she warns technological advances can make laws quickly redundant

By Rebecca Sellers*

Still whirling from the social media revolution, banks and insurers question if financial services is next in line for disruption. 

New Zealanders can borrow or raise equity through peer-to-peer lending and crowd funding. Peer-to-peer insurance is used by social networks to share risk.  Increasingly, the ability of individuals to validate has value. “Are we all good?” fits our psyche as New Zealanders.  “Are we all good?” is also being asked of our companies, laws and government.

Last week 149 submissions were released on proposals to change the way financial advice is provided. The financial advice regime was formulated during the global financial crisis and it may have been too reactionary to that crisis.

The Financial Advisers Act affects the way New Zealanders choose a mortgage, save for retirement or protect their homes. The review is to ensure consumers can access the financial advice they need and want, and that such advice improves their financial outcomes. Are we all good? Reviewing the submissions suggests that there is some way to go yet.

The regime for regulating financial advice in New Zealand has not had good shelf life.

Since 2011, when it came into effect, a key principle of the regime has been undermined by technological developments. Currently if you want your particular financial situation or goals taken into consideration you can get advice only from a real person.

This does not sit well with global trends. Increasingly financial service providers, regulators and customers are looking to robo-advice. People do not like giving up blocks of time to provide information to a financial adviser: they do like spending time with their smartphones.

The smartphone is where robo-advice can be delivered, when and how the customer wants it.  Robo-advice could provide a low cost solution for the advice-gap, with good record keeping and compliance. Many submissions strongly support enabling robo-advice, but identified areas for further consideration, such as capital, governance and other potential licensing requirements.

Are we all good in insurance? The Reserve Bank has just announced a review of the regime that regulates insurance companies. The licensing process for eligible New Zealand insurers was completed only in 2013. But the days of laws sitting on a library shelf to gather dust have gone.

Insurance is regulated because it is important to have a sound and efficient insurance sector. The legislation states “members of the public are responsible for their own decisions relating to insurance”.

Reflecting this, insurers must disclose details of their insurance rating before selling an insurance policy to a customer. Realistically, the ability of members of the public to assess the prudential soundness of an insurance company is limited.

Insurance contracts are contracts of trust. We may now travel by Uber, but the things that we need protection for have not changed since the Stone Age. Have I somewhere safe to live? Who will look after my family when I die? In finding an answer for these questions, New Zealanders need to find a long term solution with a party that is secure.

Helen Clark is co-chairing the Insurance Development Forum which was launched by the World Bank and United Nations in New York last week.

That forum seeks to improve vulnerability to natural disasters: globally more than 90% of the economic costs of natural disasters are currently uninsured.

The Christchurch earthquakes brought into sharp focus the importance of insurance to New Zealanders - and the earthquakes have had a substantial impact on insurers. IAG recently obtained the backing of Berkshire Hathaway to ameliorate the costs of the Canterbury earthquakes.  Western Pacific appointed liquidators and cancelled insurance contracts. The government intervened to support AMI, setting up Southern Response to be settle earthquake claims by AMI policyholders. Any regulatory regime must ensure New Zealanders can easily access affordable insurance cover.

The current regime seeks to maintain competition within the insurance sector. How easy is it for a new insurance business to start in New Zealand? Because of our small population the cost of set up is thrown into sharp relief.  But the current scope enables Australian insurers to operate here with relative ease. How can we best ensure New Zealanders have access to cover that will enable their businesses to grow and protect their homes?

Does the current regime have the right scope?

A guarantee under which a person agrees to answer to another person for the debt, default, or liability of a third person is not a contract of insurance. It may have the same purpose and effect as an insurance policy, but the company providing such a product will not need to meet the capital or other requirements of the current regime. The review provides an opportunity to examine whether other products or services should be within the scope of the regime.

Distribution of insurance products is changing fast.

Since the insurance regime became law you can buy insurance from The Warehouse or on Trade Me. Commission is unlikely to be banned in New Zealand, but disclosure of commission is likely to come soon.

What impact will new ways of providing and selling insurance have on the way insurers sell their products?

These are some of the issues to be considered by the review. An issues paper is expected to be released in the fourth quarter of 2016, an options paper in 2017 and an exposure draft of any changes to the legislation in 2018.

So, New Zealand’s regulators are looking at the way they regulate to ensure our regimes are fit for purpose.

But the regulators themselves are under scrutiny. The regulatory landscape in financial services law has been transformed since the International Monetary Fund (IMF) conducted an assessment of the New Zealand financial system under the Financial Sector Assessment Programme (FSAP) in 2003. The IMF is heading back to New Zealand this year for another FSAP assessment.

The review will benchmark New Zealand’s regulation against international principles. It will consist of a full assessment for the banking system against the Basel Core Principles and a full assessment for the insurance sector against the principles of the International Association of Insurance Supervisors.

Because of the current implementation of the Financial Markets Conduct Act, New Zealand’s securities and financial market infrastructure regulation will receive only a limited review. The anti-money laundering and countering financing of terrorism regime is excluded from the 2016 assessment as it is scheduled to be reviewed in 2019 by the Financial Action Taskforce.

Are we all good? There is plenty of work going on to test that New Zealand’s regulation is meeting international best practice.

But robo-advice demonstrates that technological advances can make laws quickly redundant. Regulation must focus on principles and good governance to be resilient to technological change.

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*Rebecca Sellers is financial services leader at EY Law