Since the beginning of 2024 one of the key focus areas for the new Government has been to reform aspects of New Zealand's financial services legislation. These reforms are intended to:
- Streamline the financial services regulatory landscape
- Provide regulator clarity
- Protect vulnerable consumers
- Promote the growth of the economy, including by removing unnecessary compliance costs currently imposed on financial service providers.
A two-phased package of reforms to streamline the provision of financial services is currently underway.
Phase one of the reforms, which is largely complete, repealed the prescriptive affordability regulations made for the purposes of the Credit Contracts and Consumer Finance Act 2003 (CCCFA), revoked redundant regulations relating to COVID-19, and amended the Responsible Lending Code to guide how lenders assess affordability following revocation of the affordability regulations.
Phase two, which is currently in progress, involves a more significant review of financial services legislation. The main focus is, again, to improve clarity, remove unnecessary compliance costs and improve outcomes for consumers. As a consequence, the following legislative reviews are taking place:
- Obligations imposed on financial institutions under the Financial Markets (Conduct of Institutions) Amendment Act 2022
- Effectiveness of high-cost credit provisions, liability and disclosure obligations in the CCCFA
- Progressing legislative reform to transfer regulatory responsibility for the CCCFA from the Commerce Commission (the Commission) to the Financial Markets Authority (the FMA)
- Ensuring that the existing financial dispute resolution system is accessible and effective.
Concurrent to the shifting financial services regulatory landscape, the Commission and the FMA have been considering their respective approaches to regulatory oversight and enforcement.
The Commission and the FMA have recently released documents outlining their proposed approaches to the regulation of financial services in New Zealand.
The Commission's Enforcement Response Guidelines
On 31 July 2024, the Commission released updated Enforcement Response Guidelines (Guidelines). The Guidelines have evolved significantly since their last iteration, published in 2013, and provide more clarity on what types of enforcement response may be used by the Commission, when, and why. The changes reflect developments in the Commission's enforcement approach, which has been refined over the last decade.
There is now a direct reference to and emphasis on how the Commission will treat self-reporting and cooperation by entities when deciding to take enforcement action or deciding on an enforcement response. The following are outlined in the Guidelines as relevant factors for determining the appropriate enforcement response following an entity's self-report and/or cooperation in the event of breach:
- Whether the self-report was voluntary, or instead required under a mandatory reporting obligation
- What, if any, voluntary remediation the entity has carried out or plans to carry out
- Whether the entity demonstrates "remorse, cooperation and a positive attitude towards future compliance".
The Guidelines also outline the different enforcement approaches (or 'tools') that the Commission may use in response to breaches (whether actual, suspected or alleged) of the legislation administered by the Commission. These include the Commerce Act 1986, Fair Trading Act 1986 and (for now) the CCCFA.
In outlining its regulatory toolkit, the Commission briefly sets out a description of the relevant enforcement tool, the additional factors which are taken into account and the Commission's approach when using each enforcement tool.
The enforcement tools that may be used by the Commission are as follows:
- Compliance Advice Letters: which educate recipients on potential breaches and how to avoid them
- Warning Letters: which inform recipients of likely breaches, encourage behaviour change, and educate the public
- Agreed Outcomes: negotiated settlements or enforceable undertakings to resolve issues without court proceedings
- Infringement Notices: which are issued in respect of clear breaches, with immediate penalties
- Court Proceedings: for the most serious breaches, can involve criminal or civil actions including injunctions and penalties. The Commission may also issue what they describe as a 'Stop Now' letter (which directs an entity to stop engaging in its current conduct) where they view the conduct as particularly harmful.
The Guidelines explain factors that the Commission may take into account under each enforcement tool, as well as the Commission's likely approach under each path. Overall, it is a helpful document which should guide entities in considering their responses to and actions in respect of any actual, suspected or impending breach.
FMA's Statement of Intent 2024–2028
In June 2024 the FMA released its Statement of Intent (SOI) effective for the period between 1 July 2024 and 30 June 2028. The SOI sets out the FMA's four-year outlook in respect of its strategic objectives and the impact of the FMA's activities during the four-year period. The SOI comes at a time when the FMA is navigating a period of significant transformation under the new Government.
One particular area of focus for the new Government is a 'simplified model' of regulatory engagement. Under this approach the Reserve Bank is to remain the prudential regulator and the FMA to become the 'single conduct regulator' of financial markets and financial markets participants.
As part of this change, oversight of the CCCFA will be shifting from the Commission to the FMA. This is a considerable change to the status quo, given the Commission has regulated compliance of the CCCFA since its introduction in 2005.
The SOI is intended to highlight the key transformational shifts and impacts that the FMA will aim to make in the next four years. It sets out four strategic objectives that will underpin the FMA's focus:
- Evolving the FMA's outcome-focused approach
- Evolving the FMA's intelligence-led approach
- Deterring harmful unregulated activities
- Deterring misleading and deceptive practices.
The SOI provides that the FMA is "…evolving its supervisory approach with industry to focus more on the outcomes that matter for consumers and markets. This evolution means we will be more forward-looking, and prioritise efficiency and risk-based decisions, to ensure we proactively look to streamline our approach and reduce unnecessary regulatory burden on providers."
An outcomes-focused approach means that the FMA's enforcement work will focus on conduct that is particularly harmful to consumer and market outcomes. This may be different to the enforcement approach outlined in the Commission's Guidelines (as described above), given that the Guidelines seem to focus on enforcement of breaches or suspected breaches regardless of any particular impact or outcomes (though we note under the Guidelines effect on consumers will be a factor that the Commission will take into account in selecting its enforcement tool).
As well as streamlining its approach and reducing burdens on regulated entities, the FMA has indicated that it will adopt a more robust approach to those operating in legal 'grey zones', by seeking to disrupt partially regulated actors and unregulated activities on the FMA's regulatory perimeter. The FMA intends to use its full regulatory toolkit (such as guidance, exemptions, and designations) and broader influence (including domestic and international engagement), and "testing the boundaries of [its] remit through regulatory and Court actions".
For the next four years, the FMA will focus on building an outcome-focused regime, centered on preventative action so as to proactively identify risks and opportunities to prevent harm to consumers and markets. As oversight of the CCCFA shifts from the Commission to the FMA, we should expect to see the FMA using its 'regulatory toolkit' to proactively reduce misleading and deceptive practices in the financial services industry, as well as providing greater clarity to the industry on what constitutes misleading and deceptive practices – particularly in response to new and novel market developments.
Our views
Overall, we expect that the reforms - aimed at streamlining the financial services regulatory landscape and removing unnecessary compliance costs – will be seen as a welcome change by industry.
The Guidelines are transparent and provide entities with a high-level of understanding of what can be expected from the Commission in an enforcement situation. They also provide clarity and certainty of the Commission's approach for entities under investigation.
As oversight of the CCCFA shifts from the Commission to the FMA, regulated entities can expect the enforcement response between the Commission and the FMA to look different. The FMA's stated intent to continue to focus on an outcomes-based approach in general supervision as well as enforcement is likely to result in enforcement action being taken for contraventions involving harm to consumers or of significant relevance to the market. This is consistent with previous statements by Samantha Barrass, such as "an outcomes-focused approach does not start at what the legislation says, or a rule book says, it starts with what is the right outcome for a strong sector that works well for all" (Keynote speech at FSCO, 25 January 2023).
We anticipate that the FMA will place more responsibility on regulated entities to proactively understand, assess and address what may constitute 'harm' to consumers and markets. While the FMA will continue to use its full enforcement toolkit, including Court proceedings, public warnings and enforcement undertakings, we do not expect that there will be a significant increase in enforcement action, as the FMA will want to ensure that any litigation commenced has high prospects of success.
The Commission's approach to enforcement in the Guidelines, while providing clarity on the extent of its remit, does not leave a lot of room for entities to make risk-based decisions focusing on the best interests of customers and the market, and this could stifle innovation in the financial services industry.
We recommend that regulated entities work closely with legal advisers to understand the steps that they may need to take both during the transition period, and after.
If you have any questions on the Commerce Commission's or the FMA's enforcement processes, and what this may look like for you, please contact one of our team.
This article was co-authored by Cora Morrison (senior associate), Emma Geard (senior associate), Tom Carr (solicitor) and Delia Fu (solicitor).
