The death of CoFI? But do principles ever die?

Mark Jephson
August 2023

At the Financial Services Council conference last week, the National Party made a policy announcement stating that if elected, they would repeal the Financial Markets (Conduct of Institutions) Amendment Act 2022 (CoFI).

This, amongst one or two other policy announcements, undoubtedly increased the intensity and volume of the chatter during the conference coffee break.

CoFI only became law on 29 June 2022 and will come fully into force on 31 March 2025. At a high level, CoFI requires financial institutions to comply with the principle of treating their customers fairly.

Obviously, the National Party is not in government, and it is not guaranteed that come 14 October 2023, they will be. So, as it stands, CoFI is not dead.

However, this begs the question, do principles ever really die even after repealing principle-based regulatory constructs such as CoFI?

I think the answer is that they don’t, but they can certainly be forgotten from time to time.

CoFI’s purpose was to help ensure that in financial services, the perfectly reasonable societal principle of treating people fairly was not overlooked in the pursuit of shareholder profits.

It’s a bit like a ‘friend’ of mine, who, when he was about ten years old, had, along with his older brothers, a craving for a Moro bar. So, after encouragement from his older brothers (i.e., his metaphorical directors and senior managers), he stole a Moro bar from the local dairy. But then they remembered, after prompting from the younger brother (the metaphorical whistle-blower), the principle of ‘thou shall not steal’, so he snuck back into the diary and put the Moro bar back.

I suspect the fear of their mother (i.e., their metaphorical regulator) finding out may have also impacted the decision.

So, while principles do not die, this does not mean there needs to be an extensive legislative construct around how to comply with them.

Perhaps that was what the National Party meant by its reference to ‘cutting red tape’.

The extent of the CoFI requirements, such as a full licencing regime and valid concerns regarding regulatory overlap, creep, and confusion, is worthy of further consideration and debate to ensure that financial services conduct legislation is fit for purpose in the New Zealand context.

CoFI could be viewed in some instances as ‘using a sledgehammer to crack a nut’; however, I think if National were to lead the next government, they should be mindful not to ‘throw the baby out with the bath water’. There have been several good initiatives that CoFI and the FMA have, at least in part, brought to the surface.

We have assisted several financial services providers in preparing for CoFI.

We have observed and supported some positive initiatives, such as improving the fair treatment of vulnerable customers and an improved focus on ensuring product suitability and service through the full product lifecycle. In some cases, this has led to product rationalisation or simplification alongside an increased focus on servicing and meaningful customer engagement throughout the product lifecycle.

These are good initiatives and a good demonstration of the fair conduct principle in action, and for those prepared to think long-term, they are also good for business. Financial institutions should not need to take a ‘wait and see’ approach to these types of initiatives pending the election outcome.

Financial institutions will need to remember that any wind back or repeal of CoFI does not mean the perfectly reasonable principle of treating your customers fairly does not apply, only that the personal responsibility for ensuring it is met will rest with those within the financial institution and, most importantly, their directors and senior management.

Society eventually holds financial institutions to account if principles are forgotten, and regulators will be encouraged to act where they can.

In any event, incoming ministers of any new government will receive detailed briefings from their respective officials, in this case MBIE. While CoFI may be repealed in a National-led government, some of the legislative intent behind CoFI, such as addressing some of the legislative and enforcement gaps in respect of New Zealand’s financial services legislation compared to other jurisdictions, may come back in a different and, perhaps, a more watered-down form.

For example, the National Party has also stated that, if elected, they will reduce or change the scope of other pieces of financial services legislation; perhaps as a trade-off to these changes (including any repeal of CoFI), we will see a National-led government introduce more express principles-based obligations into other existing pieces of financial services legislation.

Lastly, as initiated by the current government, and perhaps it will be taken further by a National-led government, there is a strong desire to increase competition and informed consumer choice in the financial services sector; the proposed Consumer Data Right Framework is one example of this.

Surely those financial institutions genuinely guided by the principle of treating your customers fairly will be the winners (and certainly not the losers) in an environment of increased competition and informed consumer choice?

So, perhaps it is wise to continue to hold off reaching for that metaphorical Moro bar regardless of the CoFI outcome.