A recently released Cabinet paper on the progress of the Financial Markets (Conduct of Institutions) Bill, now awaiting its second reading, reveals that while the government has dropped the idea that financial institutions such as insurers should train, manage or supervise the intermediaries selling their products, the requirements won’t be clear until the SOP is released.

But the government says it has responded to industry concerns that the proposed obligations on insurers and intermediaries were too broad, unworkable and duplicate the new regulatory regime for financial advisers.

Many of these intermediaries are independent businesses and insurers have raised concerns about how they might be expected to manage independent third parties.

The government has conceded that this obligation might lead to “undesirable structural changes in the market”, such as intermediaries reducing the number of institutions they work with in order to avoid having to comply with multiple conduct programs. This could reduce competition and choice for consumers which would undermine the intent of the legislation.

The new regime to be outlined in the SOP will be more flexible and less prescriptive, the government says, and will include a tighter definition of an intermediary. In future, only those who sell and distribute product will be considered intermediaries – a move the industry sees as positive.

But the government is still holding tight to its view that financial institutions are responsible for creating fair outcomes for consumers, regardless of distribution channels. This harks back to the 2018 reviews the FMA (Financial Markets Authority) and Reserve Bank did of banks and insurers where it was revealed that (among other things) many insurers did not consider themselves responsible for poor customer outcomes.

On the issue of COFI and the upcoming SOP, Catriona Grover, a partner at Dentons Kensington Swan, told a recent panel discussion organised by the Financial Services Council that uncertainty about this detail is making it difficult for an industry that is also trying to comply with FSLAA (the Financial Services Legislation Amendment Act) and the new licensing regime.

Many are struggling to figure out how these might interact with COFI when they don’t know exactly what COFI will require by way of fair conduct principles and how to implement effective policies and procedures.

“We are seeing a range of approaches,” Grover says. “Some clients are getting down into the detail and having a go at their distribution agreements, actually defining what is poor conduct, what is misconduct and what is fair, through to the other end of the spectrum where financial institutions are just requiring parties to the agreement to focus on good outcomes. So, there is a real breadth of approach across the industry.”

The best practical solution might be for parties to update their distribution agreements but in such a way that these can be amended when the legislation is finally passed and the details are clear, she says.

“Provided that you have that ability, I don’t think it matters too much which approach you take to your distribution agreements now.”

Apart from the workload, which some industry players have described as “crippling”, there is also the high cost of compliance with all these regimes.

One intermediary, who describes his business as “small”, told Good Returns this week that compliance would add between $20,000 and $30,000 in costs to his company each year. He said the average age of insurance advisers was 60 and he expected up to a third of them to quit the industry before the new compliance regimes come into force.