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Unpacking FMA’s Guide to Conduct

13 Jul 2017 Financial markets, Financial adviser law

We have just concluded our mid-year panel sessions discussing FMA’s Guide to Conduct with panellists Nick Kynoch of the FMA and Mark Jephson of Guardian Trust, with Catriona Grover providing expert legal adviser comment and David Ireland chairing proceedings.

There were some invaluable insights offered by our panellists. In this Financial Law Insight, we share some of the key takeaways and practical tips from the sessions for those who were unable to attend.

FMA’s Guide to Conduct was published in February 2017, following a consultation process during which market participants and some legal advisers queried the basis of the Guide and how they were expected to respond. The issue? The Guide did not represent ‘black letter law’ for participants to comply with, and the FMA had no legal basis for ‘imposing’ good conduct duties. The draft guide was labelled by some as ‘fuzzy law’.

As observed by our panellists, by viewing the Guide simply from a compliance perspective these ‘in principle’ criticisms largely missed the point, as did questions about whether anything needed to be done in response to the Guide if it was not law?

FMA’s general counsel Nick Kynoch instead encouraged panel session attendees to view the Guide not as a set of rules but as an explanation of the FMA’s expectations and the sorts of conduct and culture it is hoping to see market participants exhibit.

He emphasised the importance of it being ‘owned’ by the business and adopted by senior leaders who set the culture of an organisation given they best understand the business and where bad customer outcomes may arise.

In essence, the Guide signals how FMA will use conduct as a lens for considering provider behaviour, and for shaping how it interacts with providers.

The questions posed in the Guide are best seen as helpful prompts to the sorts of questions providers should be asking themselves, as opposed to a regulatory questionnaire demanding answers.

The challenge for market participants therefore becomes identifying how their business will operationalise the Guide.

What is the FMA looking to see?

Nick Kynoch clarified that the FMA wants to see evidence that providers have genuinely considered customer outcomes in their decision-making, identified risks of poor customer outcomes, and actively considered the steps they could take to mitigate those risks. Being able to provide examples off what had been done in practice was also important. ‘Don’t tell us, show us’ was a key mantra he espoused.

What was particularly comforting for our panel session attendees was the confirmation that perfection is not expected, and that bad customer outcomes do not necessarily mean that there has been ‘bad’ conduct.

How do supervisors view good conduct?

Mark Jephson shared some of Guardian Trust’s perspectives as a supervisor and frontline regulator.

A key takeaway from his contribution was the benefit of clearly documenting robust decision-making processes that include a genuine consideration of customer outcomes and what is in their best interests.

Mark also emphasised the importance of having a long-term focus, and ensuring conflict management procedures were designed to put customer interests first. Shades of FMA’s recently released updated Statement of Intent there!

Finally, he noted that ‘good’ organisations have a level of independence, diversity of thought, and are generally happy to be transparent and engage with their customers, stakeholders, supervisors, and the FMA.

Some legal tips

So, how else do you practically demonstrate you have put the Guide into action?

Catriona Grover shared a few useful techniques for embedding conduct and customer interests into your processes, particularly due diligence processes. This is not just something for directors to consider around the board room table – it also needs to be at the heart of your frontline staff’s customer interactions and middle-management thinking.

Documenting your own Code of Conduct / set of ethical behaviours that have regard to the Guide could be a good option for some, but only if it would be something more than just another policy to pop in the bottom drawer and dust off whenever the regulator or supervisor comes knocking. Avoid tokenism, as odds are you will be caught out if you can’t demonstrate that you have put words into action. 

A further key learning is not to be afraid of going beyond prescribed wording if that is what is required to address the needs of your customers. Yes, compliance with legal requirements is essential, but it is not an end in itself. Always think about how prescribed messaging can be packaged up to deliver a better customer outcome. If in doubt, check in with the FMA or your supervisor – in most cases you will find your objectives are aligned (assuming, of course, that your objectives include placing customer interests first!)

Conclusion

The FMA’s Guide to Conduct heralds a new way of approaching the discharge of legal obligations. It is not a checklist or manual that provides any form of safe harbour for provider conduct – but ignore it at your peril!

The Guide itself is but one of a number of similarly themed publications the FMA has produced of late, and all of them are compulsory reading. In particular, its updated Statement of Intent released at the end of June and its Strategic Risk Outlook and Conduct Outcomes Report all reflect a consistent customer-centric view of how providers should behave. It is no longer enough to just ask ‘is it lawful’? You must also ask – is it right?
 

For more information

If you would like a briefing from one of our experts on the Guide and what it means for your business, please contact David Ireland, Catriona Grover, Nick Summerfield, Karen Mace or Tom McLaughlin, or email the team at financialmarkets@kensingtonswan.com.

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© 2017 KENSINGTON SWAN The contents of this newsletter are for general information purposes only, and should not be acted upon without specific advice. Kensington Swan does not accept any liability other than to its clients, and then only in relation to specific requests for advice.

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