This article is based on a speech given by FMA Director of Banking and Insurance Clare Bolingford to a recent Financial Services Council webinar about the insurance sector, our expectations and future work in this area. Read the full speech.
New Zealand is undergoing one of the most significant evolutions to the way we regulate financial institutions, reflecting a need to ensure our laws keep pace with public expectations, changing customer demands and technology.
This means changing our regulatory lens at the Financial Markets Authority - Te Mana Tātai Hokohoko to look at how fair and equitable are the outcomes that customers experience.
Customers are more interested in – and affected by – whether their product works for them and if they receive a good service than whether particular rules have been followed and a box has been ticked.
New Zealand is catching up with a known legislative gap relative to other countries by legislating for a new conduct regime governing how banks and insurance companies should behave.
We are also grappling with the larger issue of how conduct regulation itself keeps up with shifts in market and customer behaviours and have the opportunity to see how other countries have fared and what we can learn from their experiences.
In November last year, Sean Hughes, a Commissioner of the Australian Securities and Investment Commission, said that “at the heart of all ASIC’s regulatory endeavours lies a resolute focus to ensure good consumer outcomes”.
The UK Financial Conduct Authority’s latest consultation on a new consumer duty sets out clearly that firms should “act to deliver good outcomes for retail clients”.
This new UK requirement calls for a standard of conduct “characterised by honesty, fair, and open dealing, and acting consistently with the reasonable expectations of retail customers.”
While the legal basis and some of the language differs, there is a strong consistency with the outcome-focused principle in the New Zealand legislation – the Financial Markets (Conduct of Institutions) Amendment Bill - to ensure customers are treated fairly.
Importantly for firms, the approach is about shifting to a mindset focused on customer outcomes rather than compliance processes and checklists.
Who it affects and how
A good start to understanding what a good customer outcome looks like is to exercise an empathetic focus on the customer.
It means viewing things from their perspective. That can be when designing, offering and distributing products and services and in all post-sale interactions. It also means thinking about the customer experience throughout the full lifecycle of the product.
Everyone in the business needs to be thinking like this - from the board and executive team through to customer service units and everyone in between. It is categorically not just the job of the conduct team, the risk management team, or the compliance team.
It means asking questions like:
- does the customer need this product?
- am I helping them to make an informed decision?
- do they understand what they are getting?
The FMA’s new chief executive, Samantha Barrass, recently put it like this: “…it means people get the financial products and services they need, when they need them, and they do what people reasonably expect them to do.”
If the sector fails this apparently simple but challenging test, governments tend to reach for more prescriptive tools. If the principles we expect firms to apply are clear, but there is no evidence of changing the practices that cause poor outcomes, more rules may be eventually required to protect customers.
Key questions
Companies need to think holistically about how documents help customers understand policy features. This means asking questions like:
- Have we tested consumer understanding of our policies?
- What do current queries and complaints about terms tell us about how customers understand, or don’t understand, our policies?
- How do we identify customers who may have difficulty understanding policy documents and what support could we put in place?
- Are there new technologies we can use to aid and check customers’ understanding?
Under the new regime, banks, insurers and non-bank deposit takers will need to comply with the principle to treat consumers fairly and establish, maintain and implement a “fair conduct programme”.
Defining fair treatment
It means paying due regard to consumers’ interests and that means putting the customer at the forefront of any strategy.
Firms need to have a “whole of company” approach to how they think about the customer. It means moving away from a legalistic compliance plan to a focus on good conduct risk management to deliver fair treatment.
It means actually checking how products are performing for customers rather than just assuming they work because it fits with the commercial strategy. It means communicating clearly and regularly with customers and acting quickly if something goes wrong.
It’s going to take investment in systems and in people.
But with a relentless focus on the customer, the financial services industry will build confidence in its services, be sustainable and continue to support the financial wellbeing of New Zealanders long into the future.
