A Financial Markets Authority (FMA) report on its supervision activities over the past 18 months says large parts of the financial services sector are working hard to meet the FMA’s expectations, but called for further and more widespread improvements to governance and compliance.
Rob Everett, FMA Chief Executive, said some of the issues identified in its monitoring were concerning and he anticipated the regulator would take increasingly strong action where deficiencies are not remedied appropriately or in a timely manner.
“We are at a point now where the volume of FMA guidance, level of engagement and maturity of the regulatory regime mean there are no excuses for conduct that presents the risk of harm to investors, customers and the integrity of the markets,” he said.
“While we have seen positive evidence of genuine customer focus during COVID-19, there is more work to be done to build a sustainable customer-centric culture.”
The FMA has found weaknesses across its regulated sectors in four main areas:
- governance and oversight
- conduct and culture
- compliance assurance programmes
- compliance and controls
“Trust and confidence in our financial institutions has been tested significantly over recent years and we have made conduct within financial services firms our first priority,” Mr Everett said. The FMA communicated its conduct expectations through its 2017 conduct guide and following the 2018 and 2019 joint Reserve Bank/FMA reviews of conduct and culture within banks and life insurers.
“Firms need to constantly assess their conduct and culture to ensure good customer outcomes are core to their compliance systems and their overall strategy,” Mr Everett said.
“We saw much good progress over the last year but were unimpressed by attitudes from one or two firms that suggested to us that they saw good conduct as something that only needs to be demonstrated when we visit. This is not a box-ticking exercise, it needs to be woven into the culture of providers.
“Good conduct comes from the top. We expect boards and senior leadership to champion customers’ interests, and to demand the systems and processes required to deliver strong governance of these issues.”
A Compliance Assurance Programme (CAP) is required by certain entities regulated by the FMA and entity boards are expected to seek assurances that CAPs are up to standard and to challenge management when needed. Notwithstanding this, the FMA found examples of CAPs that were poorly designed or implemented.
Issues with QFEs, advisers and derivatives issuers
Three sectors were identified as having particular issues: derivatives issuers, authorised financial advisers (AFAs) and qualifying financial entities (QFEs)*.
A questionnaire completed by derivatives issuers indicated significant weaknesses in the way many issuers assessed customers’ knowledge, experience and understanding of derivatives, which are complex financial products. In some cases, issuers had insufficient processes or policies to support their compliance with client money handling obligations. The FMA will be applying targeted monitoring to follow up on the questionnaire responses.
Weaknesses were found in some AFAs’ and QFEs’ financial advice disclosure practices. The FMA said it will increase its focus on these two sectors and expects improvements, especially given the new financial advice regime, which begins in 2021.
The FMA regards confidence in financial advice as a critical component in the health of New Zealand’s financial sector and will be working hard with the advice sector to ensure considerable efforts applied by most AFAs and QFEs are matched by all advisers and firms.
The FMA released this report so firms can learn from the issues raised and evaluate their own conduct and compliance against those issues. The report was based on monitoring engagements, complaints and other information received from January 2019-June 2020.
The FMA takes a risk-based approach to its monitoring and supervision activities, prioritising areas that present the greatest risk of investor or customer harm. Monitoring is necessarily designed to identify deficiencies and breaches, or the risk of breaches, rather than highlight good practices, so the report is focused on adverse findings across the period.
The FMA is looking at ways to highlight examples of best practice in compliance with regulatory obligations and customer focus more generally. Many firms and advisers are progressing well and it is important to reflect the significant benefits that financial services providers deliver to New Zealanders every day.