Fmas Crackdown On Breaches Of FMCA Fair Dealing Provisions

The Financial Markets Authority (FMA) filed High Court proceedings against Tower Limited (Tower) in March 2024.  The FMA is seeking a declaration that Tower breached the fair dealing provisions in the Financial Markets Conduct Act 2013 (FMCA) and payment of pecuniary penalties to the Crown (the amount sought is yet unknown).

The FMA alleges that Tower breached the fair dealing provisions in the FMCA by misleading customers:

  • In failing to apply its multi policy premium discount offer as advertised to eligible customers since 10 September 2016
  • In failing to make clear in marketing materials that the multi policy discount only applies to specific policies or that specific terms would apply before the discount was applied,

and that the failures occurred due to fundamental flaws in Tower's IT systems and a lack of adequate controls.  As at 22 May 2024, Tower has not filed a statement of defence.

As at the date of this article, the extent of overcharges is stated to be approximately NZ$9.5m with around 65,000 customers (81,200 policies) affected.  The FMA has stated that the number is not final as harm is ongoing for some customers. 

Tower has paid NZ$9.26m in respect of approximately 58,000 customers to date, under a settlement agreement entered into with the Commerce Commission in October 2017. 

Section 22 of the FMCA, contained in the "Fair dealing" Part, prohibits certain false or misleading representations in respect of any dealing in financial products, the supply or possible supply of financial services, or the promotion by any means of the supply or use of financial services.

The FMA's Head of Enforcement, Margot Gatland, has said that the proceedings are:

"Another example of where an insurer has failed to invest in the systems, controls or governance processes to ensure that where errors occur, they are picked up quickly and fixed, and customers are remediated in a timely way.  A significant number of customers have been overcharged over a long period as a result of Tower’s failure to address these problems.”

This latest proceeding reflects a recent trend of the FMA's enforcement activity against financial service providers including insurers for breaches of the fair dealing provisions in the FMCA, particularly in relation to multi policy discounts.  A non-exhaustive summary of recent warnings and proceedings issued by the FMA are as follows:

  • On 26 March 2024, the FMA issued warnings to Southern Cross Medical Care Society and Southern Cross Pet Insurance for breaching the FMCA by failing to apply advertised discounts to each entities’ respective insurance products.  The total overcharges were NZ$586,055 across 9,499 customers, and both entities have completed remediation programmes and issued refunds to most affected customers.
  • In June 2023, the FMA filed proceedings against AA Insurance for failing to apply multi policy and membership discounts or guaranteed no claims bonuses to eligible customers’ premiums, resulting in NZ$11.12m in overcharges.
  • In June 2023, the FMA filed proceedings against Medical Assurance Society New Zealand Limited and its subsidiaries for (among other things) failing to apply its multi policy discount or incorrectly applying a lower rate of the discount affecting around 8,864 customers, with approximately NZ$3,318,997 in overcharged premia.  In November 2023, Medical Assurance Society New Zealand Limited was ordered to pay a penalty of NZ$2.1m.
  • In late 2022, the FMA filed proceedings against Vero Insurance New Zealand Limited for failing to apply multi policy discounts, which led to around 42,000 affected customers being overcharged approximately NZ$9.9m in premia.  Vero admitted that it had breached section 22 of the FMCA and in October 2023 was ordered by the High Court to pay a penalty of NZ$3.9m.
  • In 2022, the FMA filed proceedings against Cigna Life Insurance New Zealand Limited for making false and/or misleading representations relating to inflation benefits in certain life insurance policies provided by the company.  In January 2023, the High Court ordered Cigna to pay a pecuniary penalty of NZ$3,575,000.

In many of the above cases, penalties are being ordered for overcharging that resulted from failures of systems and processes.  The absence of dishonest or malicious conduct in these cases is demonstrative of the FMA's focus on customer outcomes rather than provider conduct.

What's next for the FMA?

On 31 January 2024, the FMA announced in a speech by Chief Executive Samantha Barrass that the FMA would continue to engage with the industry in creating an outcomes-based regime that avoids regulatory "box-ticking", highlighting the importance of the two-way conversation.

We anticipate that this "two-way conversation" means that financial service providers can expect increasingly hands-on engagement from the FMA on internal policies and processes, and how they ensure good outcomes for customers.  This will be felt in particular by the NBDTs, registered banks and licenced insurers that have, to date, been supervised by the Reserve Bank of New Zealand, but will now be subject to FMA oversight under the COFI licencing regime.

In addition, the new Minister of Commerce and Consumer Affairs, Andrew Bayly, announced the Government's intention to reform the CCCFA and transfer regulatory oversight of the CCCFA from the Commerce Commission to the FMA.  We expect that FMA to be heavily involved in these reforms, as the FMA has committed to working closely with the government to implement the proposals, stating that the proposals "offer the opportunity to streamline and bring New Zealand up to best of class, learning from what has, and has not worked overseas."

As well as being less prescriptive, this will likely result in a shift in the focus of lending regulation.  Oversight by the Commerce Commission has focused heavily on adequate disclosure (to ensure customers are making informed choices).  This may shift to an onus on lenders to ensure good outcomes for customers.  While some might see this as a beneficial change, we note that the Commerce Commission has never sought penalties from a lender for reasonable failures of systems and processes that have been identified and remedied.  The simplification of the regulatory regime may, in fact, result in the need for lenders to re-evaluate risk and compliance programmes and risk appetites.

If you have any questions in relation to the FMCA, or compliance, control or remediation processes, please contact one of our team.

This article was co-authored by Cora Morrison (senior associate), Emma Geard (senior associate), Zar Sinclair (senior solicitor) and Delia Fu (solicitor).