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FMA's strategic risk focus to include conflicts of interest, mis-selling, KiwiSaver switching, incentive arrangements and fee-driven behaviour

FMA's strategic risk focus to include conflicts of interest, mis-selling, KiwiSaver switching, incentive arrangements and fee-driven behaviour
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The Financial Markets Authority (FMA) has issued a report on strategic risk outlook outlining seven areas it'll focus its attention on over the medium-term.

The FMA lists as its seven priorities;

- Governance and culture: boards and directors leading strategy, culture and values
- Conflicted conduct: firms and professionals managing conflicts of interest effectively
- Capital market growth and integrity: facilitating capital market growth and supporting market integrity
- Sales and advice: sales and advisory services reflecting the best interests of investors and consumers
- Investor decision-making: investors having access to tools that help them make informed financial decisions
- Effective frontline regulators: ensuring frontline regulators are effective
- The FMA maximising its own effectiveness and efficiency as a regulator.

In the report the FMA notes registered banks account for about 80% of total New Zealand financial system assets. It also says vertically integrated distribution models, where a market participant is the provider, manager and distributor of a product, can exacerbate conflicts of interest and result in poor investor outcomes.

"This is particularly the case when the profit-making interests of the market participant are put ahead of the interests of investors. Remuneration and incentive arrangements can fuel this risk further, resulting in unfair investor outcomes and undermining confidence in our markets and financial service providers," the FMA says.

"Through our entity based monitoring, we will focus on distribution models that exacerbate conflicts of interest. In particular, we will look at remuneration arrangements that can lead to conflicted advice or sales, and whether firms have in place appropriate safeguards to prevent mis-selling. These remuneration arrangements may include certain volume-based incentives, up-front commissions and trail commissions."

"Within the managed funds sector, we will also focus on fee-driven behaviour that is likely to result in unfair investor or market outcomes," the FMA says.

The regulator also says it wants to address the mis-selling of financial products, noting KiwiSaver is becoming an increasingly important part of the national economy.

"While KiwiSaver balances continue to grow and the number of new KiwiSaver members slows, competition for KiwiSaver business is expected to intensify. From a regulatory perspective, we are concerned that members receive appropriate advice and support when they transfer their KiwiSaver. Some of the sales practices we have discovered through our monitoring activity do not reflect the best interests of customers."

"With this in mind, KiwiSaver mis-selling and particularly KiwiSaver switching sales processes and advice will be key monitoring themes for our team," the FMA says.

See a Double Shot interview here with FMA CEO Rob Everett where he raises concerns about banks' KiwiSaver behaviour.

Insurance mis-selling also on the radar

Sales of insurance products are also on the regulator's radar.

"Mis-selling of insurance products, including selling products that do not meet the customer’s needs, or churning of customers (rapid turnover of insurance business that is not in the customer’s interest), is also an area of concern. We have received an increasing number of complaints regarding insurance sales and will undertake work to more accurately size the problem. Insurance mis-selling will be included as a key monitoring theme for our team," the FMA says.

Everett says the FMA has to make choices about where to focus its efforts in order to deliver the maximum results, taking into account its expanded mandate as the Financial Markets Conduct Act takes effect.

“The FMA’s overarching objective is to promote and facilitate fair, efficient and transparent financial markets. Defining the risks that pose the most significant barriers to us achieving our main objectives means we can focus our resources strategically," says Everett.

“Firms and professionals within our mandate should anticipate us paying attention to the seven priorities over the next two to three years. Also, representatives of the finance professions - including directors, auditors, legal counsel and financial advisers - can expect us to work with them constructively on these areas to improve outcomes and build confidence.”

Everett says the seven priorities don't mean the FMA won't be looking at other areas of the financial services industry.

Here's the FMA's full strategic risk report.

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they should set up a national fraud database


The mis selling of Insurance and activity of loan sharks lead to distrust in areas were public trust is critical so regulators need to be responsive to complaint and not hide behind a lack of funds or resources. IN the case of professionals found guilty of serious breaches of legislation mandatory jail time and financial penalty should be the norm to deter others.