Posted: 20 Dec. 2022 5 min. read

The future of fair

Conduct of Financial Institutions for banks & insurers

With the introduction of a new conduct regime, $150 million in remediation payments by banks and insurers since the 2018/19 joint RBNZ/FMA review, and 88% of New Zealand’s population with at least one characteristic of vulnerability according to the Financial Markets Authority, now is the time for banks and insurers to uplift their conduct frameworks.

The new Conduct of Financial Institutions (CoFI) legislation requires registered banks, non-banks and insurers to comply with the fair conduct principle. They must hold a license to act as a financial institution, implement a Fair Conduct Programme (FCP) and comply with incentive regulations. The legislation is deliberately principles-based, with the FMA expecting financial institutions to leverage their own knowledge of their consumers to develop a fit-for-purpose FCP. 

This article discusses some of the steps that financial institutions can take to prepare for CoFI.    

What does ‘fair’ look like?

The requirement to treat consumers fairly includes:

  • Paying due regard to consumers’ interests
  • Acting ethically, transparently, and in good faith
  • Assisting consumers to make informed decisions
  • Ensuring that the relevant services and associated products that the financial institution provides are likely to meet the requirements and objectives of likely consumers (when viewed as a group)
  • Not subjecting consumers to unfair pressure or tactics or undue influence

Don’t be put off by the principles-based nature of the legislation, financial institutions should look at these requirements for treating consumers fairly as a baseline and start asking the right questions. 

“Can we identify and respond to different drivers of vulnerability?”

“Do we have evidence and data supporting that our products are suitable and meet consumer needs?”

“Do we have controls in place to ensure we don’t apply undue pressure to consumers at all stages of the customer journey?”

These are just some of the many questions financial institutions will need to answer “yes” to for a successfully implemented FCP.

Financial institutions that clearly define what fair is for their customers will avoid the pitfalls of a cookie-cutter approach, and doing this early will enable them to better allocate their resources and focus to the right areas.

Integral to this process is being able to demonstrate and show evidence that the activities captured in the FCP are truly delivering fair outcomes with clear proof points. This should include lead and lag indicators and there are several data points that can be used, such as complaints data, cancellations, lapses, and usage of product.

Understanding Current State

Equipped with an understanding of how they will meet the fair conduct principle, financial institutions should review their current state to understand the actions required to develop an FCP that meets those objectives. Financial institutions will have already implemented conduct frameworks and should obtain clarity on any gaps and what processes, systems, and controls should be retained, improved, or replaced.

The principles-based nature of CoFI can make undertaking a current state assessment challenging. Deloitte’s CoFI framework for financial institutions has been built from extensive experience designing and implementing conduct frameworks and leverages a global network of conduct risk experts. It can be used as a baseline for a structured current state review and support the end-to-end delivery of CoFI projects. This comprises different components that would be expected in an FCP and applies the lenses of people, process, systems, and governance to look at each area holistically.

Where to next?

Agreeing on fair outcomes for their consumers and assessing the current state of their conduct framework is a good place for financial institutions to start. This will lead to a more meaningful current state assessment and a more targeted FCP. The release of guidance from the FMA also provides a further reference point to commence this exercise to prepare for the 2025 implementation of the regime.  

Get in touch

David O'Carroll

David O'Carroll

Director - Financial Services

With over 12 years of risk, compliance and legal experience in both New Zealand and overseas, my experience is underpinned by professional qualifications as a Chartered Accountant and as an admitted lawyer in Australia. Part of the risk and regulatory team, I’m passionate about uplifting the risk maturity and resilience of New Zealand’s financial services sector. My areas of expertise include conduct risk, risk framework design and implementation, regulatory and compliance, internal audit, remediations and business continuity.  

Rhys Hermansson

Rhys Hermansson

Partner - Financial Services

Rhys is a Partner within Deloitte's Financial Services Risk and Regulatory team.  He has spent over twenty years working within the Financial Services sector, both in New Zealand and the UK, helping his clients navigate through their complex regulatory and operational risk challenges.  His experience includes developing and implementing risk frameworks for CCCFA, and FSLAA, as well as leading conduct reviews, product governance assessments and remediation investigations.     Rhys' broad experience means he can apply a pragmatic approach when advising clients in relation to regulatory change, risk management, remediation and compliance.  He is a firm believer in helping clients move away from seeing compliance as a tick-box exercise, to looking at the wider opportunity.