The Government's financial services reform agenda has reached Parliament with the introduction of three Bills reflecting last year's "fit for purpose" consultations.

Together, these Bills advance significant changes to consumer lending laws, change elements of the conduct licensing regime (and broader Financial Markets Authority licensing framework), and grant the FMA some significant new powers.

Consumer lending will see the most significant change

The Credit Contracts and Consumer Finance Amendment Bill contains the well-signalled transfer of responsibility for the oversight of consumer lending from the Commerce Commission to the FMA. We support this change, which will reinforce New Zealand's "twin peaks" regulatory model, with the Reserve Bank of New Zealand overseeing prudential matters and the FMA overseeing conduct.

The transfer of responsibility to the FMA will see the end of the fit and proper "certification" regime for consumer lenders that are not otherwise licensed by the Reserve Bank or FMA. This arrangement will be replaced with a conventional FMA market services licence, covering consumer lending. Existing certified lenders will be treated as having been issued a market services licence.

Moving to a licensing regime for consumer lending makes sense. It means consistency across the universe of entities licensed by the FMA and aligns with the new single conduct licence regime (more on this below). However, it will be a step up from the current certification regime, both in terms of the likely regulatory scrutiny before granting a licence, and ongoing oversight.

It is worth noting that the transfer of responsibility for consumer lending to the FMA will also have an incidental impact on non-consumer lending. In particular, all lending will become subject to the general fair dealing rules in the Financial Markets Conduct Act 2013 (FMCA).

The director and senior manager due diligence duty will go

The Credit Contracts and Consumer Finance Act 2003 (CCCFA) director and senior manager due diligence duty is problematic, and was a focus of last year's consultations, which sought feedback on various options.

Under current law, a breach of the due diligence duty can result in personal liability, which cannot be indemnified or insured against. The Bill removes the due diligence duty, on the basis that it is not considered necessary under the new regulatory approach (i.e., FMA licensing). This was our preferred option, and we are pleased to see it was adopted.

However, it must be noted that the full overlay of FMCA licensing obligations and FMA oversight will apply instead, and the Bill introduces new provisions into the CCCFA adding conventional FMCA powers like stop orders, direction orders, and declarations. Lenders who have not previously had a relationship with the FMA or the FMCA will find this to be a significant change.

Penalties for incomplete disclosure will become less onerous

The Bill includes welcome changes to the penalties for incomplete disclosure. The CCCFA currently has a highly punitive regime for disclosure breaches, including the forfeiture of all interest and charges when a lender does not make complete initial or variation disclosure. Lenders can apply to the Court for relief, but only from the consequences of disclosure failings from December 2019 when sections 95A and 95B were inserted into the CCCFA, allowing lenders to seek relief.

The Bill will reverse the default position, meaning that a borrower will continue to be liable for interest and charges notwithstanding an error with initial or variation disclosure. However, the Court will be able to make an order for redress (based on some of all of those costs) if it finds the breach resulted in loss or damage, and if it considers other orders are insufficient.

While these changes are forward-looking only, the Bill also includes an unexpected retrospective change allowing a Court to reduce the effect of disclosure failures between 6 June 2015 and 20 December 2019 (which currently it does not have the power to do). This is unusual, and appears to signal a huge win for banks subject to class action proceedings for historic disclosure breaches. It will be interesting to observe how the Court deals with the proposed legislative amendment, particularly given the litigation funding arrangements at play.

An accompanying regulatory impact statement explains the potential impact on ANZ and ASB (the banks subject to class action proceedings) as "significant but probably not existential", and identifies the impact on the wider market as being of greater concern. We agree with that analysis. While there is a need to ensure suitable consumer protection, our experience of advising clients on breaches of disclosure rules is that the current settings are wholly punitive and can result in potential penalties that are well out of step with potential harm.

The earlier discussion document also sought feedback on potential changes to the content of required disclosure, how information is disclosed, or both. We didn't think these proposals would really go anywhere, and they haven't. The Bill contains some minor changes, but nothing of particular note – and certainly less than that some will have hoped for.

The move to a single FMA-issued licence

Over the years, the FMA's licensing remit has expanded and as a result, there are now eight different market service licences. There is inherent duplication in this model, as the FMA considers some of the same points across different licence types.

As was proposed in the consultation paper, the Financial Markets Conduct Amendment Bill will require the FMA to issue a single consolidated licence for different classes of market services licence. This will happen automatically for existing licensed entities. We have a lot of questions about how this will work in practice – and particularly what will be involved in adding a new class to an existing licence – but for now, the framework itself is a welcome change.

The consultation paper also proposed allowing the Reserve Bank and the FMA to rely on the other regulator's assessment of matters where appropriate to licensing, such as when conducting fit and proper assessments. This isn't reflected in the Bill.

FMA approval will be needed for changes of control and significant transactions…

The Bill introduces a framework requiring FMA approval to changes of control of licensed firms. At present, there is a requirement to notify the FMA of a pending change in control, which (in our experience) can lead to engagement with the FMA, but there is no formal approval requirement.

The new approval requirements will apply when someone obtains significant influence, defined as 25% or more of the voting rights in the licensee, or the ability to appoint 50% of directors. The process will also apply to transactions involving a material part of a licensed business, and amalgamations.

The provisions are based on the Reserve Bank approval process under the incoming Deposit Takers Act 2023, and the FMA will be required to consult with the Reserve Bank where an institution is dual licensed. While we can see the rationale for this change, it does add additional deal complexity.

… and the FMA will also have new on-site inspection powers

The Bill also introduces a new on-site inspection power which will allow the FMA to enter a financial markets participant's premises without notice.

This proposal received a lot of commentary during the consultation phase with many opposing the proposal. We supported the proposal during consultation on the proviso that it was subject to appropriate limits comparable with those imposed on the Reserve Bank – i.e. the power must be exercised at a reasonable time and in a reasonable matter, consistent with the purpose of the power. These limits are included in the Bill.

The proposed power for the FMA to require an "expert report" which was part of earlier consultation is not included in the Bill.

Tinkering with the CoFI framework

Financial institutions (banks, insurers, and non-bank deposit takers) have, at the time of writing, been subject to the CoFI regime for about a week. Obviously, that is not long enough to have a real sense for how the regime is operating in practice.

Nevertheless, the Bill contains several minor changes to the minimum content required in fair conduct programmes. These include changes to the requirements around training, supervising, and monitoring employees, removing the broad requirement relating to existing legal obligations, and adding a new requirement about resolving complaints in a timely and effective manner.

The potential new minimum requirement relating to fees and charges which was consulted on has not eventuated, although the minimum requirement relating to communication will be expanded to expressly cover the price of services or products. Similarly, the Bill does not propose any changes to the fair conduct principle itself.

The biggest issue with the Bill's changes to the CoFI framework is timing. The changes are not significant, but they will require financial institutions who have only recently entered the regime to refresh their fair conduct programmes to address the new requirements.

What about debanking?

A separate private members bill, the Financial Markets (Conduct of Institutions) Amendment (Duty to Provide Financial Services) Amendment Bill, was pulled from the ballet in February. It proposes a change to the FMCA that would require any financial institution (not just a bank) to provide financial services and is intended to address the vexed issue of debanking.

In our view, that Bill is fundamentally flawed. The Bill presupposes that ESG considerations would never be a "valid and verifiable" commercial reason for a financial institution to not provide services, which just isn't correct. However, there is no doubt that debanking is an emerging issue and some argue that a basic bank account should be a universal right.

Could we see further developments on this as the Bill moves through the Parliamentary process?

Other changes

Both of the Bills contain a raft of other changes not mentioned above, including various technical amendments to the CCCFA, FMCA, and Financial Markets Conduct Regulations 2014. The Bills need to be read carefully alongside the current legislation to fully understand the changes.

A third Bill, the Financial Service Providers (Registration and Dispute Resolution) Amendment Bill, proposes changes intended to ensure that financial dispute resolution schemes are governed and operated in an effective and independent manner for the benefit of consumers.

Next steps

At the time of writing, the three Bills were awaiting their first reading in Parliament. Once that occurs, the Bills should be referred to a select committee for public submissions. There is little insight on the timeframe for that process, other than to note that the Council of Financial Regulator's latest regulatory initiatives calendar shows the select committee process extending until Q3 2025.

These are significant reforms. We encourage anyone with an interest in the sector to read the Bills carefully and consider making submissions on any points of interest.

Get in touch

Anthony Harper's internationally recognised financial services team is actively supporting clients across the financial services sector on conduct licensing, consumer lending, and law reform. If you have any questions, or need help with your business, please get in touch.

‍