The new Minister of Commerce and Consumer Affairs has revealed he wants to reform the levers of the country’s financial services regulation inherited from the previous government rather than start from scratch.
This begins with the new Government planning to reform instead of bin the incoming conduct licensing regime for banks, insurers and non-bank deposit takers – known as the Conduct of Financial Institutions Act.
Bayly expanded on plans in these areas at his first address to the financial services sector on Wednesday, which was hosted by the Financial Services Council at Auckland's Hilton Hotel.
He told attendees from all corners of the financial services sector that there was “so much” he wanted to do in his new role.
“I plan to make it easier for businesses to operate.”
Bayly said since ex-Commerce and Consumer Affairs Minister Simon Power’s work in the country’s financial sector during the first-term of the John Key-led National Government, governments of “both colours” had brought in a series of legislative and regulatory changes “aimed at enhancing conduct by financial institutions”.
“Regrettably, this layering of regulation and legislation has led to the architecture governing the financial services sector losing some of its coherence and has certainly led to a lack of clarity for many of you market participants,” he said.
“Many of the changes were well intentioned, but today also to some extent, are failing to deliver optimal outcomes for kiwis and businesses.”
The Conduct of Financial Institutions Act – or CoFI as its known – was passed by the previous Labour government following scrutiny from the Reserve Bank and Financial Markets Authority into the conduct and culture of banks and life insurers back in 2018 and 2019. It will come into force in March 2025.
Last year, the National Party’s economic manifesto said it would repeal CoFI because it made credit “more expensive and harder to obtain”.
But on Wednesday, Bayly said he didn’t want to “discard” CoFI.
“I believe it's essential all financial institutions have in place fair conduct programmes that cover the following aspects of their businesses,” he said.
The first one is how do you engage appropriately with your clients and your customers? Secondly, how do you develop these policies and products, to be fit for purpose and meet regulatory requirements? Thirdly, the need to establish transparent fee structures and charging arrangements. The fourth one is the development of an adequate complaints process," said Bayly.
“Those are four vital elements. Whilst fair conduct programmes might look different for a credit union with 200 customers compared to a bank with 2 million customers, the importance of fair treatment remains the same.”
“CoFI serves an important purpose to support good financial outcomes for consumers, but it needs streamlining so financial institutions have certainty and flexibility to get on with the business of delivering for their customers," Bayly added.
Bayly also announced on Wednesday that the Government is planning to hand off oversight of the Credit Contracts and Consumer Finance Act (CCCFA) to the Financial Markets Authority and take it out of the hands of the Commerce Commission.
“We will rewrite as to protect vulnerable consumers without unnecessarily limiting access to credit,” he said.
Bayly added that credit changes made since 2019 onwards had led to processing times for lending applications increasing significantly across all loan types.
“I've heard from banks of an estimated six to seven percent of applicants who would have otherwise qualified for a mortgage and to be turned down. Change is needed to address this.”
FMA chief executive Samantha Barrass who attended the FSC event and spoke after Bayly’s speech, said aligning credit regulation “with an outcome based approach” as well as fair conduct rules would provide key infrastructure benefits alongside regulatory certainty and efficiency.
“Manageable conduct in the sector are very much in play. It would also allow expectations to evolve as new technology, products and business models emerge,” she said.
“So the FMA is looking forward to engaging constructively with the plan in the coming months, and we're ready to implement any changes that the government may be set to make as a result of those.”
Bayly said specific changes around the CCCFA and CoFI would be announced in the coming months.
Labour Party spokesperson for Commerce and Consumer Affairs Arena Williams told interest.co.nz on Wednesday that she was “watching closely” how the new Government proceeded to roll out its financial services reform.
“I will be calling for a sensible approach to CoFI because I want to see financial institutions taking their stewardship role of financial services seriously and making sure that they are providing credit to people in a responsible way,” she said.
“When you look at the proposed changes to the CCCFA, it's really important to strike the right balance between the availability of credit and consumer rights, particularly those of vulnerable consumers who are engaging in second peer lending. That can be a cutthroat business and we need to make sure that there are protections in place.”
Williams said Labour was also interested in how the new Government was going to ensure that there were appropriate resources at FMA now that the regulatory agency was taking on the CCCFA work from the Commerce Commission.
“We want to make sure that the FMA has the resourcing it needs to be able to carry out those functions that the Commerce Commission were doing so well,” she said.
Consumer NZ chief executive Jon Duffy agreed.
“The Commerce Commission has had the CCCFA for a number of years in various different forms, and they've built up quite a lot of expertise which could be lost if it's then handed to another regulator. Having said that, the FMA is a very competent regulator with expertise in the area. On one level, it makes sense, but there is a danger that there's a period of time that FMA needs to get up to speed,” he said.
“One of the things that comes out of what the Minister’s announced today, the intent behind it, is we actually need really strong enforcement here, particularly if there's any easing up on affordability and suitability requirements under the CCCFA. If those are eased up, you need a really strong regulator coming in to make sure consumers remain protected and lenders know that there's a big stick if they don't follow the rules.”