Intermediated distribution under CoFI: What the FMA thinks are not needed for compliance
High-level expectations
The regulator, in its draft guidance, outlines what are considered “high-level” expectations or those that are applicable to different sectors and distribution models.
“CoFI applies to a range of financial institutions and so the guidance needs to be workable for a diverse range of business models and distribution methods,” explained the FMA, which wants firms to have the flexibility in designing and implementing fair conduct programmes that are fit for purpose and appropriately sized for their businesses.
“This is consistent with our outcomes-focused approach to the regime and intention to empower financial institutions to take ownership of how they drive fair treatment of consumers in their businesses, including how they manage the risk of consumers not being treated fairly.”
It is for the above reasons that the proposed guidance does not set out a list of steps or rules, in line with the watchdog’s stance not to take a prescriptive approach.
Expectations of the regulator span three areas: distribution being consistent with the fair conduct principle; reviewing distribution methods; and remedying deficiencies. These include the expectation that financial institutions should consider addressing how arrangements with intermediaries will be managed.
Financial institutions are also expected to provide appropriate product information and training to intermediaries in support of fair treatment and outcomes for consumers, while at the same time intermediaries have the responsibility of ensuring they are competent, knowledgeable, and skilled to provide advice.
Steps deemed ‘unnecessary’
Under CoFI, financial institutions are required to conduct regular reviews of whether their distribution methods are operating in manner that is consistent with the fair conduct principle. The FMA, however, sees certain steps as unnecessary in complying with this requirement.
In the view of the regulator, this part of the new conduct regime does not require constant surveillance of intermediaries; monitoring individual instances of advice or individual sales; and institutions supervising intermediaries’ legal compliance.
“A financial institution’s responsibility for regularly reviewing whether distribution methods are operating in a manner consistent with the fair conduct principle is at the general or collective level, not at the level of each individual consumer interaction or sale,” said the FMA, which also pointed out that CoFI is not intended to compromise the commercially and legally separate relationship between financial institutions and intermediaries.
The watchdog went on to note: “We have heard concerns that some institutions have responded to anticipated CoFI requirements by imposing on intermediaries an obligation to obtain annual external audits or independent assurance reports, which can be costly. This cost may be magnified for intermediaries that distribute products and services of multiple financial institutions.
“CoFI does not impose any legislative requirement on institutions to require intermediaries to obtain annual external audits or independent assurance reports. Generally, we do not think external audits or independent assurance reports of intermediaries’ distribution activities are necessary for financial institutions to comply with the CoFI distribution requirements. We would not expect to see these as a routine compliance measure in most situations.”
It was, however, clarified that financial institutions are not prevented from choosing to adopt such non-required measures. For the FMA, the expectation is for external audits to be considered only for higher-risk distribution methods or in response to a specific risk or issue that has triggered an independent review.
The FMA is seeking feedback on its proposed guidance until April 14.
