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The government signed-off on new regulations under the Financial Markets Conduct (Conduct of Institutions) Amendment Act last week that will ban certain volume-based incentives.
But the rules for the legislation also known as COFI include carve-outs for financial advice providers and wholesale client-related services.
According to the just-approved regulations, any incentives paid for “relevant services or associated products” will be banned if they are “determined or calculated in any way by a direct reference to a target or other threshold that relates to the volume or value of the services or products”.
Due to take full effect on March 31, 2025, COFI, is aimed primarily at banks and insurers but the law has some spill-over consequences for third-party distributors of financial institution products.
As per the rules an “intermediary must not offer or give a prohibited incentive to a person… in connection with the provision of a financial institution’s relevant services or associated products”.
The new regulations do allow any incentives based on flat commission rates while also exempting wholesale client-related dealings from any volume-based constraints.
Furthermore, the COFI rules specify how financial advice providers can set sales target-based incentives for employees without breaching the law, including the example as below:
“An employee of a financial advice provider has a base salary of $50,000. In addition, the employee receives a commission of 5% of every dollar’s worth of all sales in a quarter if the employee hits a target of $100,000 in a quarter.
“The $100,000 target is the only target that relates to the volume or value of the relevant services or associated products.
The employee’s sales for a quarter are $200,000. The commission is $10,000 (5% of $200,000).
“The commission is not a prohibited incentive.”
As well, the regulations – which come into force in March 2025 – clarify how financial institutions can set bonuses for managers while also including insurance contracts as COFI-captured products.
Passed into law in June last year, COFI will impose a new conduct-licensing regime on banks, insurers and other non-bank financial institutions from the end of March 2025 with transitional provisions kicking-in this July.
The Financial Markets Authority (FMA) is slated to open for COFI licensing applications from July 25 this year with a final “guidance on intermediated distribution” due at the end of June.
In a speech this March, FMA chief, Samantha Barrass, said the regulator expects COFI-regulated entities to have “a resolute focus on promoting, delivering, achieving and measuring, good customer outcomes”.
“Our approach with firms will start with these outcomes and what they are doing to build their approach, strategy, processes, staff training and policies around those outcomes,” Barrass said.
“All firms will need to beef up their resourcing, capability and attention to ensuring their programmes and conduct risk frameworks are fit for purpose and do not appear to reflect a minimalist response to compliance.”
The FMA has been busy ahead of the COFI-licensing process, launching legal actions against two institutions – the Medical Assurance Society and AA Insurance – in June to date over insurance policy errors.
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