Conduct of financial institutions regime

8 December 2022

Current status

On 29 June 2022, the Financial Markets (Conduct of Institutions) Amendment Act 2022 (the Act) attained Royal assent.  The Act is expected to fully come into force in early 2025.

The Act will introduce a new regime, requiring certain financial institutions to be licensed in respect of their general conduct towards consumers.  This licence will be a new type of market services licence with a similar licensing framework as that for other types of market services licences.  In addition, the Act inserts a new subpart 6A into part 6 of the Financial Markets Conduct Act 2013 (FMCA), which requires financial institutions to prepare and comply with a fair conduct programme (in order to comply with the fair conduct principle) and comply with any restrictions on sales incentives.  The "fair conduct principle" is a high-level principle to treat consumers fairly.

The licensing regime will be monitored and enforced by the Financial Markets Authority (FMA).  The FMA has stated that licensing applications will open on 25 July 2023 and that it will further consult with the industry on the requirements for regulatory returns in the future.  The FMA ran a public consultation on proposed licensing standards that closed on 7 September 2022.  On 30 November 2022 the FMA released the final standard licencing conditions for financial institution licences as well as an application guide for applying for a financial institution licence.  In addition, on 30 November 2022 the FMA released guidance for establishing, implementing and maintaining a fair conduct programme.

The Ministry of Business, Innovation and Employment (MBIE) is responsible for developing supporting regulations prior to the Act coming into force.  On 28 September 2022, MBIE released an exposure draft of regulations and an accompanying consultation paper, with submissions having closed on 9 November 2022.

This article summarises the background of the regime, the key provisions of the Act, the proposed standard conditions of the financial institution market service licence and the next steps that will occur in regard to licensing and the development of regulations to support the operation of the new regime.

If you would like advice on the new regime, please contact a member of our financial services regulation team.


Australian Royal Commission report

On 14 December 2017, the Australian Royal Commission (ARC) was established to investigate misconduct in the banking, superannuation and financial services industry.  Over the course of 2018 and 2019, the ARC published an interim report and final report detailing poor treatment of customers across different parts of Australia’s financial services industry.

Financial Markets Authority and the Reserve Bank of New Zealand joint conduct and culture reviews

Misconduct cases in the UK, US, Australia, and other overseas jurisdictions raised concerns with the FMA and the Reserve Bank of New Zealand (RBNZ), the two key regulators of New Zealand's financial markets, about whether the same issues could exist in New Zealand, especially as New Zealand’s four largest banks are Australian owned.

In response, the RBNZ and the FMA launched a joint review into the conduct and culture in the New Zealand financial sector and produced two reports:

  • The first report, published in November 2018, focused on retail banks.  This found weaknesses in systems and processes as well as a small number of issues related to poor conduct by bank staff.  Consequently, the review recommended ways to improve oversight, controls, and processes.
  • The second report, published in January 2019, focused on life insurers.  The review found extensive weaknesses in life insurers' systems and controls such as in the approach of identifying, managing and remediating conduct risks and issues.  This contributed significantly to poor customer outcomes.  As insurers’ products are often sold by intermediaries, many insurers believed they had no responsibility for customer outcomes and made little effort towards consumer experience.  The RBNZ and the FMA provided specific findings to each individual life insurer as well as general suggestions for improvement.

Both these reports focused on finding solutions to ensure sufficient levels of consumer confidence exist in New Zealand's financial system, and that confidence is both justified and sustainable.  While the reports did not find widespread conduct and culture issues in New Zealand, they highlighted issues in how conduct risk is managed and a lack of focus on customer outcomes.  It became evident there was a gap in how financial institutions are regulated in New Zealand.  This increases the potential for more widespread consumer harm in the long-term.

Regulatory review

MBIE public consultation

On 27 April 2019, MBIE announced a round of public consultation and released an accompanying options paper and consumer summary.  The consumer summary identified the following key problems:

  • An imbalance of power between financial institutions and consumers
  • Some products are not designed with good customer outcomes in mind
  • Sales are prioritised over good customer outcomes
  • There are weak systems and controls to manage conduct risk
  • There is a lack of accountability to ensure good conduct.

MBIE received 85 submissions for this consultation before submissions were closed on 7 June 2019.

Cabinet paper and regulatory impact statement

On 25 September 2019, in response to the RBNZ/FMA reviews, the public consultation and departmental consultations, the Minister for Commerce and Consumer Affairs proactively released a cabinet paper recommending legislation be introduced to address the real risk of harm to customers of financial institutions.  The document included the proposal to create a licensing regime for banks, insurers and non-bank deposit takers (NBDTs) in respect of their general conduct.

On 9 December 2019, MBIE also published a regulatory impact statement in regards to the proposed regulatory regime.

Legislative process

Bill introduced to Parliament

In December 2019, a further cabinet paper was proactively released seeking approval to introduce the Financial Markets (Conduct of Institutions) Amendment Bill (the Bill) into Parliament and seeking policy decisions.

On 11 December 2019, the Bill was introduced to Parliament.  On 12 February 2020, the Bill had its first reading.

Select committee

The Bill was referred to the Finance and Expenditure Committee (FEC), which announced a round of public consultation that closed on 30 April 2020.  The select committee published its report on 7 August 2020.

The FEC's key recommendations included insertion of a regulation-making power that would allow regulations to be made that would exempt specified types of financial institutions from the requirement to hold a licence, an extension of the maximum transitional period for the Bill to come into force once it receives Royal assent (from two years to three years) and for there to be more clarity about the central, substantive, fair conduct principle set out in the Bill.


In April 2021, MBIE released two discussion documents and announced an accompanying round of public consultation on these documents, which closed on 18 June 2021:

  • Treatment of intermediaries under the new regime for the conduct of financial institutions
  • Regulations to support the new regime for the conduct of financial institutions.
Consultation - Discussion document on the treatment of intermediaries of financial institutions

The Bill proposed placing requirements on financial institutions (eg banks, insurers and non-bank deposit takers) to oversee and train any intermediaries distributing or managing their products (eg mortgage or insurance brokers) to ensure good outcomes for consumers.

MBIE sought submissions on topics such as:

  • Compliance with the proposed oversight and training requirements being too expensive and resource-intensive
  • Certain obligations introduced being redundant as they may potentially overlap with, or duplicate conduct regulation provisions created by the Financial Services Legislation Amendment Act 2019.

The discussion document sought feedback on matters such as the definitions of 'intermediaries', 'agents' and 'employees' of financial institutions.  The document also offered several proposals on the obligations of intermediaries, employees and agents.

Consultation - Discussion document on regulations

The Bill contained several regulation-making powers to support its operation, including powers to make regulations around the content and publication of fair conduct programmes, sales incentives and other discrete issues.

The discussion document sought feedback on matters such as the regulation of sales incentives offered or provided by financial institutions and intermediaries and details relating to the fair conduct programmes.

Key provisions of the Act

On 28 June 2022, the Bill had its third reading and was passed by Parliament.  On 29 June 2022, the Act attained Royal assent.

The Act will:

  • Require banks, insurers and NBDTs (together, financial institutions) to be licensed in respect of their general conduct towards consumers.  The licensing regime will be monitored and enforced by the FMA
  • Require financial institutions to establish, implement and maintain effective fair conduct programmes throughout their businesses that ensure they meet the requirement to treat consumers fairly
  • Require financial institutions to comply with their fair conduct programme
  • Require financial institutions and intermediaries involved in the chain of distribution to comply with regulations that regulate incentives.  These regulations will be able to restrict sales incentives based on volume or value targets, eg soft commissions such as overseas trips, bonuses for selling a certain number of financial products, or leader boards.

Implementation of the Act

The FMA has released guidance in relation to applying for a financial institution licence and on preparing fair conduct programmes, as well as the final standard conditions for financial institution licences.

Consultation - Proposed standard conditions

On 20 July 2022, the FMA released a consultation paper proposing six standard conditions to be imposed on the holders of financial institution licences and their authorised bodies.  This consultation closed on 7 September 2022.  On 30 November 2022, the FMA released the final standard conditions for financial institution licences

The final standard conditions that will apply in respect of the financial institution service (ie the market service of acting as a financial institution) are as follows:

Ongoing requirements

Financial institutions must continue to satisfy licence conditions at all times and (where relevant) maintain appropriate supervision over each authorised body.

Notification of material changes

In addition to existing notification obligations under the FMCA, financial institutions must notify the FMA within 10 working days of implementing a material change to the nature of its financial institution service (eg changing the form of business from a licensed NBDT to a registered bank might be considered a 'material change').

Regulatory returns

In addition to existing reporting obligations under the FMCA, financial institutions must provide certain information to the FMA for monitoring purposes on a periodic or ongoing basis (for example, on the implementation/maintenance of the fair conduct programme or factual information such as the number of customers).

The FMA plans to consult with the industry on the requirements for regulatory returns in the future.


Financial institutions must be satisfied that services provided by an outsource provider are to the standard required by the relevant conditions of the financial institution's licence.  The standard licence conditions set out the factors that financial institutions should consider when deciding to outsource a process/system needed to provide their financial institution service (eg the experience of the outsource provider) and when negotiating outsourcing arrangements (eg access to provider's records).

Business continuity and technology systems

Financial institutions must maintain and regularly test a business continuity plan that is appropriate for the scale and scope of their operations, supports their fair conduct programme and encompasses any outsource arrangements.

There are additional notification obligations under this condition (eg notification must be made within 72 hours after discovery of a technology event that has a material adverse impact on critical technology systems).  Critical technology systems are those systems which support any activity, function, process or service, whose loss would materially impact the provision of services or the financial institution's ability to comply with licence obligations.

Record keeping

Financial institutions must have systems and processes to maintain relevant records in relation to the provision of financial institution services.  Financial institutions must have policies to allow the FMA to inspect these records when required.

A financial institution's records should include the following:

  • A copy of the financial institution's fair conduct programme
  • A record of how the financial institution established, implemented and maintained that fair conduct programme
  • A record of how the financial institution has taken all reasonable steps to comply with that fair conduct programme
  • A record of how the financial institution reviews that fair conduct programme and identifies any deficiencies.
Consultation - Draft Regulations

On 28 September 2022, MBIE released an exposure draft of proposed regulations (Draft Regulations) supporting the Act along with an accompanying consultation paper.  MBIE sought public submissions on this exposure draft, which closed on 9 November 2022.

The consultation paper notes that the majority of submissions to the April 2021 consultation on regulations (discussed above) preferred a "specific prohibition on volume or value targets instead of a principles-based prohibition, which would prohibit any incentives reasonably expected to influence choices offered to consumers or financial advice".  In February 2022, following this feedback, Cabinet agreed, amongst other things, to prohibit financial institutions from offering sales incentives based on volume or value targets to their employees (aside from senior managers and executives).

The Draft Regulations:

  • Amend the Financial Markets Conduct Regulations 2014 and, primarily, prohibit financial institutions and intermediaries from offering or giving a "relevant person" (such as an employee or agent) a "prohibited incentive"
  • Set out that an incentive is prohibited if the entitlement to the incentive, or the nature/value of the incentive is calculated by reference to a target that relates to the volume or value of services provided
  • Provide examples of prohibited incentives and non-prohibited incentives.

The consultation paper asked for public feedback to ensure MBIE has not overlooked any technical points when preparing the Draft Regulations.  The consultation paper asked several specific questions about the Draft Regulations, including whether the definition of "relevant person" is appropriate and if the examples provided are adequate - the consultation paper notes that excluding senior managers and executives is aligned with the FMA's expectations for banks and insurers to remove sales incentives for frontline staff but that there are fewer conflict of interest issues when such incentives form part of more senior management's remuneration.

Consultation - Licensing fees

On 28 September 2022, MBIE released a discussion paper on licensing fees under the new regime.  This consultation closed on 26 October 2022.

The paper set out that obtaining a licence will be a "one-off process" and that licences won't have an expiry date.  The purpose of the licence application is for the FMA to "assess whether the applicant is capable of effectively performing the service of acting as a financial institution" and gather information about sector level conduct risks and maturity to inform its monitoring and supervision functions.

The paper estimates that approximately 100 financial institutions will require a licence and that the fees will help the FMA recover costs associated with the new regime.

The paper proposes an application fee of $1,024.93 for all applicants, with the ability for the FMA to invoice an applicant an additional $178.25/hour for complex applications where the assessment time exceeds 6.75 hours.  The paper also proposes an additional fee of $115 plus $178.25/hour for applications to vary licence conditions.

The paper also sought feedback on alternative options such as a flat fee for all applicants regardless of complexity, setting different licence classes for different types of financial institutions or on the size of the business, and the use of Crown funding instead of fees.


Fair conduct programmes

The fair conduct programme information sheet sets out what the FMA considers to be "good practice" in relation to establishing, implementing and maintaining a fair conduct programme.  This includes specific guidance as to the different aspects that a financial institution needs to consider when establishing, implementing and maintaining its fair conduct programme.

The information sheet also includes a range of examples for how financial institutions can satisfy the requirements of the FMCA.  The FMA makes it clear that these examples are non-exhaustive and simply illustrative.  The examples do not impose any further requirements on financial institutions.

Licence application

The application guide for financial institution licences sets out the FMA's expectations of a financial institution's policies and procedures in order for financial institutions to be eligible to apply for a financial institution licence.

The application guide for financial institution licences includes a range of questions, in relation to both the financial institution's compliance with the Act and the financial institution's directors and senior managers being fit and proper, which the FMA may ask throughout the licence application process, as well as additional guidance as to how financial institutions can best provide the required information to the FMA.

Next steps

The Act notes that the new regime will come into force by Order in Council.  MBIE and the FMA have both stated that the new regime is planned to come into force in early 2025.

The commencement provisions of the Act note that any provision that has not already been brought into force will come into force 'on the third anniversary of the date of Royal assent' (ie on 29 June 2025).

In a media release on 30 November 2022, the FMA stated that applications for licences will open on 25 July 2023 and that it will "engage and support the sector to prepare for and apply for licensing, leading up to and after this date".

We regularly publish updates on developments relating to the new conduct of financial institutions regime.  Please subscribe to receive these updates.

If you would like advice on the new regime, please contact a member of our financial services regulation team.