Simon Papa probes whether the FMA’s outcomes guide is a revolution in financial regulation

By Simon Papa*

On 20 March the Financial Markets Authority (FMA) released its “Outcomes-focused regulation” guide. FMA says this heralds a fundamental change in how New Zealand’s financial markets are regulated. It sets out FMA’s new approach to its role as the country’s financial markets conduct regulator.

The FMA received 50 submissions on a draft version of the guide, released in November 2023. Many submitters expressed unease that the FMA was, under the cover of “outcomes”, attempting to impose new rules without the benefit, or the burden, of parliamentary approval. The FMA, for its part, says this was simply a failure to adequately communicate its intentions. The final version, FMA claims, anchors each outcome in law, by reference to objective and purpose statements in law. In this article I assess key parts of the finalised guide including considering whether it has resolved the misgivings expressed by submitters.

The guide says outcomes-focused regulation will “reduce unnecessary regulatory burden”. That does not quite square with the fact that the existing regulatory rule book is not changing- financial service firms cannot pick and choose which laws to comply with. FMA indicates it will use discretionary powers to support implementation of outcomes-based regulation, which it suggests will include some deregulatory measures. But, at this stage, it is not at all clear how FMA’s new approach will be implemented in practice, what financial service firms can or should do in response, or what impact the new approach will have on financial markets and consumers.

While FMA’s intent with the guide is commendable, the guide’s description of the outcomes, and FMA’s new approach to its role, are described at a fairly high level. FMA’s upcoming “financial conduct report”, a complementary annual publication referred to in the guide, will therefore be key to understanding the true effect of the guide. The report will set out FMA’s regulatory priorities for the next year, highlight “key risks to outcomes”, explain how those risks inform regulatory priorities, and highlight practices that support better outcomes as well as areas where attention is needed. “Risk” is doing a lot of work in FMA’s description, so it will be crucial to see how the risks relate to the existing rule book firms must comply with. It is likely best for firms to wait for the report before taking any significant steps in response to the guide.

What are the outcomes?

The guide sets out seven “key outcomes” that FMA will use to guide its regulatory endeavours. Those outcomes are titled: fair services; quality ongoing service; improved access to products and services; resilient markets and providers; market innovation and growth; well-informed investors and consumers; market integrity and transparency. I consider some of them in more detail below.

What has changed from the draft guide?

The draft guide used the word “fair” (and variations) 62 times and used the term “fair outcomes” to describe the outcomes generally. The final guide uses the term “fair” six times and “fair outcomes” is absent. However, “fair” is in the title of one outcome (fair services) so “fairness” remains relevant. Also, FMA’s statutory objective, and one of the purposes of the Financial Markets Conduct Act, include the concept of “fairness”, so “fairness” is relevant to FMA’s role generally. So, FMA may have softened its emphasis, but not its intent to rely on “fairness” as the key yard stick for regulating financial markets conduct.

Perhaps the most controversial outcome in the draft guide, that “consumers receive fair value for money”, has been dropped entirely. FMA was likely influenced by the “consumer duty” in UK law that requires financial service firms to provide “fair value” to consumers. I noted in a January 2024 article that there are grounds to be concerned about a return to regulation of market prices, however well-intended. The law already gives FMA an express price regulation role in relation to KiwiSaver provider fees. In addition, FMA has fashioned from retail fund manager duties an obligation to set fair fees via circumlocutions in guidance such as “a [fund] member’s share of the financial value of investment management must be appropriate for the risk they are taking and the cost they have paid”. And the conduct of financial institutions (CoFI) law coming into force on 31 March 2025, which introduces a general duty on banks and insurers to treat customers fairly, potentially gives the FMA another legal foothold to push for price regulation. Still, dropping the fair value for money standard is a positive development and might indicate a retreat (perhaps tactical) from the fair value concept.

The “fair services” outcome is new but consolidates other parts of the draft guide including from the outcome titled “consumers can trust providers to act in their interests”. This outcome applies to financial products also. The description of this outcome includes some straightforward propositions, such as “financial products and services deliver what is promised”. It also includes the phrase “expected benefits reflect risk”. A Google search did not identify a single other reference to this turn of phrase on the internet. So quite what FMA intends this to mean is unclear- perhaps simply a caution against mis-selling of risky products? Another part of the description is “providers do not improperly take advantage of information or power asymmetries”. What FMA considers is “improper” remains to be seen but it could potentially be used as a mechanism to push for “fair value” or other controls on how core aspects of markets operate. In any case, financial markets law and other consumer law already prevent misuse of, and mitigate the effects of, such asymmetries to some extent.

The “well-informed investors and consumers” outcome is largely the same as the equivalent draft outcome. The final version helpfully also emphasises the consumer end of the market economy equation by noting that the purpose of the information is to help improve consumer financial capability and to empower consumers to take responsibility for financial decisions.

The outcome “improved access to products and services” is described as “Our financial markets deliver services and products that meet New Zealanders’ needs. This promotes confident participation in financial markets.” The draft outcome referred to “diverse consumer needs” and “diversity of products and services”. But the absence of “diversity” is unlikely to change the overall meaning of the outcome. I consider this outcome further below under “Improved access ambiguity”.

The guide confirms support for “market innovation and growth” as an outcome. FMA now refers to some concrete ways it is seeking to support that outcome. For example, through FMA’s “regulatory sandbox”, and improving market access via licensing processes and FMA’s exemptions power. Those initiatives appear to be a response to the Commerce Commission’s August 2024 banking competition report, which found pervasive regulation in the sector disproportionately impacts innovative fintech businesses, inhibiting the development of competitors.

What is the purpose of the outcomes-focused approach?

FMA states that the outcomes-focused approach will provide benefits such as understanding and addressing the most significant risks and opportunities for businesses, investors and consumers, reducing unnecessary regulatory burden, and providing more flexibility for firms to meet regulatory obligations. Those goals have obvious merit but it is not clear at this stage how the outcomes-focused approach will achieve them. The regulatory rule book doesn’t change, so firms still have to comply with all rules, even the most pedantic and confusing. However, FMA has indicated that it is willing to use its discretionary powers (including to grant exemptions) more liberally to ease compliance burden and to ease market. access.

FMA says its new approach will support it to decide how best to allocate its own resources and to prioritise its work. However, the guide indicates that the outcomes are more than about internal prioritisation. FMA seems to see the outcomes, and FMA’s role in relation to them, as being very much focused on how firms themselves provide their products and services. For example, FMA’s stated intention is to “influence how firms manage the main risks to consumer and market outcomes, through their governance, product design, distribution models, resourcing, complaints-handling, and systems, controls and processes. We want firms to have the flexibility to determine how best to meet regulatory obligations in the context of their own business.” Given the hundreds of pages of existing regulation, it remains to be seen whether that list of expectations is consistent with reducing regulatory burden or achieving better outcomes for consumers.

Are the outcomes new law?

FMA says the outcomes-focused approach is not about creating new law, noting that; “the key outcomes we are seeking to support are aligned with our main statutory objective and the purposes of the legislation under which we regulate”. That objective (and one of the purposes of the Financial Markets Conduct Act- (FMC Act) “is to promote and facilitate the development of fair, efficient, and transparent financial markets.” FMA also relies on the other “main purpose” in the FMC Act, which is to; “promote the confident and informed participation of businesses, investors, and consumers in the financial markets”.

FMA is technically correct when it says that the objective and the purpose statements are law. However, they are not specific legal obligations or duties that bind anyone. For example, no firm has a duty in law to ensure “informed participation of … investors … in the financial markets”, though this may be supported via specific obligations in law such as disclosure requirements. FMA has signaled that it may make greater use of underutilised tools that allow FMA to, in effect, change the law.

The function of objective and purpose statements in law is to describe FMA’s role (objective) and to guide the interpretation of law and the use of discretionary powers (objective & purpose). Financial markets law grants FMA extensive discretionary powers including to grant exemptions, make designations (which FMA has done four times in 10 years under the FMC Act), publish information (including to issue warnings), and to set requirements & conditions for financial services licences. It is clear from the guide that FMA wants to use those powers more often, including its designation power, for example to bring financial services and products on its “regulatory perimeter” into the regulatory net.

The licensing process for various categories of financial services is likely a key route for FMA to seek to give effect to the outcomes. That’s because FMA’s licensing function is built around a single, broad, threshold- FMA must grant a licence if FMA is satisfied that a licence applicant is “capable of effectively providing that service”. But there are limits. The focus is on the service the applicant intends to provide. So, in my view, FMA’s licensing function does not, for example, provide a means for FMA to influence what services an applicant should provide via the “improved access to products and services” outcome, (more on that below). FMA helpfully indicates that it may limit the scope of services or products some licence holders can provide, where they would otherwise not meet the criteria for grant of a licence.

Improved access ambiguity

The “improved access to products and services” outcome is particularly ambitious and, in my view, could most likely risk claims of overreach. That outcome is described as; “Our financial markets deliver services and products that meet New Zealanders’ needs”. This appears to link to FMA’s goal of seeking to better understand the market and firms it regulates (it has employed a team of economists for that purpose). Understanding the market is certainly critical for any market regulator. And, if FMA intends to use its powers to support the entry of a wider variety of providers into the market, via its exemption, designation and licensing powers, that is welcome.

FMA supports the “improved access to products and services” outcome by reference to the statutory purpose of the FMC Act to “promote the confident and informed participation of businesses, investors, and consumers in the financial markets”. It would be a stretch in my view to suggest that that purpose supports improved access, if that means influencing the particular financial products and services firms provide. In part, that’s because financial markets law does not mandate what products and services should be provided to consumers (reflecting that New Zealand has a market economy). Rather the law is mostly concerned with how financial products and services are actually delivered including with respect to disclosure, governance, management capability, business infrastructure and avoiding misleading conduct (see my comments on that in this article).

The “product design” obligations under CoFI law, which require banks and insurers to design services and products “to meet the requirements and objectives of likely consumers (when viewed as a group)”, might appear to be a requirement to serve particular consumer groups. But CoFI law does not go that far. It still leaves to firms the right to choose which consumer groups they service. So, as with some other parts of the guide, the question is whether FMA intends a recalibration or a revolution.

*Simon Papa is a commercial lawyer with 20 years experience and director of Cygnus Law. Cygnus Law is a boutique law firm that specialises in advising businesses in the financial services sector.