On 22 July 2021 the FMA released the findings from its evaluation of New Zealand fire and general insurers’ responses to the FMA/RBNZ 2019 life insurer conduct and culture review.
The report card does not make for pretty reading, and media commentary has been scathing. On the eve of the Financial Markets (Conduct of Institutions) Amendment Bill – commonly referred to as the CoFI Bill – becoming law, the fire and general insurer sector’s socks are down and a lot of work is required to pull them up to the right level.
In this Financial Law Insight, we take a look at the key findings from the FMA’s evaluation, share some thoughts on how we think fire and general insurers might have got to this position, and look at how the sector can improve its grades.
- Only two out of 42 insurers met the FMA’s expectations with their responses to a range of conduct and culture questions.
- The FMA found 30 of those responses inadequate, and another 10 deficient in some way.
- Issues identified include a need for greater commitment to conduct and culture, unsatisfactory product and policyholder review processes, inadequate intermediary oversight, and poor approaches to remediation.
- Overcharging in the sector will see substantial refunds flowing back to affected customers.
- Pockets of good work were identified.
- With conduct licensing for insurers in the pipeline, the sector has a lot more work to do to meet the FMA’s expectations.
A history lesson
The genesis of the FMA’s evaluation exercise was, of course, the Australian Royal Commission (ARC) inquiry into Misconduct in the Banking, Superannuation and Financial Services Industry in 2018. That prompted the FMA and RBNZ to take a closer look at the conduct of banks and insurers in New Zealand, and in January 2019 they published their Life Insurer Conduct and Culture review (Conduct Review).
The Conduct Review included a directive for all insurers to actively consider conduct risk within their business. Later in 2019, the FMA wrote to all licensed fire and general insurers, asking them to:
- Develop an action plan to address any issues in their business arising from the recommendations in the Conduct Review.
- Explain how they will meet the FMA’s expectations regarding incentives and commissions.
- Complete gap analyses against the ARC’s final report and the FMA’s 2017 Conduct Guide.
- Undertake a systematic review of products and policyholder portfolios.
With the intervention of COVID-19, fire and general insurers were given until December 2020 to provide their responses. To assist them in completing this exercise, the FMA provided ‘how-to’ guides for completing the work, including a guide to completing the required gap analysis against the ARC’s final report, which only 24 out of 42 responding insurers completed.
The FMA freely acknowledges that current laws do not impose specific conduct requirements on insurers, whether they be the life insurers who were found wanting in the 2019 Conduct Review, or the fire and general insurers now appearing in the spotlight. Nevertheless, the FMA has high expectations of insurers to demonstrate good conduct. It saw this evaluation exercise as an opportunity for fire and general insurers to demonstrate their readiness for conduct licensing under the CoFI Bill.
The ‘not achieved’ report card
‘With their substandard response to FMA’s request, insurers have [not only failed to demonstrate readiness for conduct licensing, they have], also revealed a worrying lack of commitment to ensuring good customer outcomes. While new legislation is not yet in place, core conduct standards should apply across the entire financial sector’. Clare Bolingford, FMA Director of Banking and Insurance
To say that the teacher is not happy with the responses from her insurer students is an understatement. The key concerns were:
- the level of conduct maturity was low, with some insurers demonstrating that they did not see conduct and culture as relevant to their organisation.
- product and policy holder review processes needed improvement.
- insurers need to have a clearer line of sight on commissions paid to intermediaries, including whether they are fair and reasonable to customers and understood by customers.
- insurers should have greater oversight of how intermediaries are selling and managing their products.
- many boards are yet to support the development of an organisational culture that promotes good conduct, with an appropriate conduct risk appetite.
- not enough has been done to ensure remediation activity is completed promptly, and addresses the root cause of issues.
Amongst all this negativity, there were a few positives. The FMA commended those insurers that had engaged external consultants to assist with their response, and those who had identified customer vulnerability as a key issue. The majority of insurers had removed or committed to removing volume-based sales incentives for internal staff.
Why did the F&G sector end up with a fail?
To be fair, there is a lot going on for all financial service providers at present, and the past 18 months has not been an easy ride. The demands placed on resources to respond to the Insurance (Prudential Supervision) Act review and prepare for (and implement) the new financial advice regulatory regime have been extreme.
Despite the FMA’s comments about the clarity of its communications regarding its conduct expectations, the regulatory spotlight to date, at least outwardly, has fallen squarely on the banks and life insurers. We are also talking about a request for information from a regulator that fire and general insurers have not needed to have much to do with pre-2021, in relation to non-legally prescribed expectations and readiness for a conduct regime that is yet to be passed into law.
However, excuses like that are unlikely to wash with the FMA. It was similarly dismissive of the criticisms raised when its views on conduct were first published back in 2017. While there wasn’t a specific regulatory obligation to observe the good conduct principles espoused by the FMA in its Conduct Guide, the FMA has consistently placed good conduct and culture at the heart of its regulatory focus.
A challenge for the fire and general insurance sector is that prior to the financial advice regulatory reforms coming on line, it has had minimal interaction with the FMA. The processes they had in place to manage compliance with the black letter of the law, including obligations as a licensed insurer, may have seemed perfectly adequate. That’s not to say those compliance obligations are straightforward - far from it - but the regulatory imperative to embed processes to evidence good conduct has not really been there to date. Other commercial and regulatory priorities take precedence.
How to improve the grades
The FMA is trying to generate a move in the regulatory approach taken by financial institutions from being compliance-based to risk-based. That involves doing things because they should be done, and not just because they must be done. With the CoFI Bill just around the corner, the clock is ticking to make that shift.
Whether or not you agree with the FMA’s somewhat scathing assessment, you can’t accuse it of lacking transparency. Or of being coy about steps that financial institutions can take to get a merit pass in their next survey. And if the experience of the banks and life insurers is anything to go by, they can be certain there will be a next survey. More likely, several surveys.
Once financial institutions – and in particular the fire and general insurance sector – have taken a deep breath and digested this latest dose of regulator medicine, there’s a wealth of learnings to take from the FMA’s findings on conduct and culture.
Perhaps the best tip for all financial institutions from FMA’s fire and general insurer update is to ensure they can clearly evidence the fact that they are taking conduct risk seriously. Amongst other things, that requires avoiding treating any request for information from the FMA as a mere compliance tick-box exercise.
The FMA is fixated on financial institutions lifting their conduct and culture game. More than two years after its release, the spectre of the ARC’s final report looms large in regulatory thinking. Ensuring that New Zealanders can have confidence that our financial institutions are not exposed to the same level of criticism that was levelled at their Australian counterparts is a regulatory priority.
At the very least, all financial institutions should have some form of conduct risk policy embedded in their compliance framework. That policy needs to be operating effectively, with clear ownership taken by the institution’s governing board.
Recognising and dealing with vulnerable customers, appropriately and proactively remediating issues as they arise, and reviewing the ongoing suitability of products, are increasingly becoming matters of expected organisational hygiene. These are not just nice-to-haves. And you need to be able to demonstrate that the processes you have in place in that regard are working effectively, and embedded throughout the organisation.
Ensuring that incentives and commissions are appropriately structured to support good customer outcomes and discourage bad behaviour is another essential on the good conduct shopping list. Financial institutions also need to have effective systems in place to monitor the behaviour of their intermediaries when interacting with customers.
The measures that can be taken to demonstrate good conduct and culture within financial institutions are extensive, and the FMA’s expectations are only going to increase. While the implementation of the conduct licensing regime being ushered in via the CoFI Bill might seem a long way off, the work required to support it is extensive.
At the time of publishing this Financial law Insight, the CoFI Bill was sitting at No. 2 on the latest Parliamentary Order Paper, with debate on its second reading interrupted. Part of the reason for its delay is to allow time for MBIE to respond to the consultation papers released earlier in the year. The outcome of those consultations will both influence the final scope of the legislation itself, as well as inform the regulations required to support the regime. See our May 2021 Financial Law Insight for more information on that consultation process, or contact one of the team if you would like a copy of our submission.
The FMA has been very clear that the time to start getting ready for the new world was yesterday. Those that are lagging behind are unlikely to get much sympathy. This latest release from the FMA serves as a further reminder that that regulatory patience with those that are failing to grasp the conduct and culture message is wearing thin. The teacher will not be shy about calling out and issuing detentions to those whose conduct grades fail to meet its expectations.