An assessment of New Zealand's financial system under the International Monetary Fund's (IMF) Financial Sector Assessment Programme (FSAP), has identified gaps in the regulation of insurance and recommends immediate action be taken to enhance insurance intermediary and conduct regulation and supervision.
The FSAP report, released last week, notes that current regulation around insurers’ conduct is focussed on financial advice.
It stated: “Other aspects of insurance conduct of business are less well covered and in many cases not covered at all in regulation or covered only in FMA [Financial Markets Authority] guidance.
“A developing framework of self-regulation in general insurance and established dispute resolution services help reduce risks to customers, but do not substitute for regulatory requirements and effective oversight.”
The report also points out “aspects of the insurer’s relationship with customers where there may be misconduct, including the handling of claims and complaints, and advice on (nominally) simpler products provided by registered financial advisers (RFAs), are effectively unregulated.
“Risk-based supervisory oversight… is largely limited to financial advice.”
Beefed up regulations needed around conduct
The IMF says the government and FMA should review the scope of conduct regulation for insurance, “considering all aspects of the insurance product life cycle”, and develop a regulatory framework.
The IMF says the intermediaries in the regulatory void include those “ancillary to another line of business”.
On the positive side, the IMF recognises that the government already plans to “strengthen or remove the registration-only regime currently available to intermediaries, introducing minimum requirements for competence and disclosure that apply to all advisers, including insurance brokers”.
The report adds that the government should consider a proportionate regulatory regime for insurance intermediation not currently captured by the legislation, including pure sales and intermediation where ancillary to another line of business. The FMA should assess the need for insurance-specific requirements on intermediation as well as an insurance-specific work programme, taking into account its overall assessment of risks in financial markets
While MBIE is yet to reveal how beefed up disclosure requirements will look, it says these will be “re-designed to ensure consumers receive core information such as remuneration (including commissions) at the time most relevant to their decision making”. Currently only AFAs have to disclose how they are paid, while Qualifying Financial Entity advisers have to disclose this if they are asked and RFAs can keep quiet on the matter.
The IMF says New Zealand authorities acknowledge its recommendations on the issues, “bearing in mind that the FMA’s reach into insurance is limited to incidences of mis-selling or misrepresentations and the regulation of financial advice as it relates to insurance agents and brokers”.
The IMF report identifies how New Zealand’s regime departs from the IAIS Principles and makes recommendations familiar to Australian insurers. These include:
- On-site inspections, better resourced approach to supervision and increased powers for the Reserve Bank;
- The establishment of dedicated risk management and internal audit functions in insurers;
- Better policyholder protection;
- Comprehensive corporate governance standards; and
- Increased Reserve Bank oversight of outsourcing, reinsurance, investments and off-balance sheet business.