Inside the FMA - Fair Dealing Cases

In the first episode of our new podcast series Inside the FMA, we discuss the Financial Markets Authority’s efforts to ensure fair dealing in New Zealand’s financial services sector. Since the Conduct and Culture review in 2018, the FMA has taken 12 cases to court, leading to over $215 million in customer repayments and $16 million in penalties.

Join Sinéad Lloyd, Manager Investigations, and Rachael Manttan, Head of Evidence and Investigations, as they discuss:

• what constitutes a fair dealing breach under the Financial Markets Conduct Act
• how poor systems and controls can lead to long-term consumer harm
• the importance of self-reporting and proactive product reviews, and
• expectations under the Conduct of Financial Institutions (CoFI) regime.

Stay informed and learn how the FMA is working to protect everyday New Zealanders.

Visit our website for more insights: https://www.fma.govt.nz

Transcript

Heidi: Kia ora everyone, welcome to Inside the FMA, a podcast from New Zealand’s Financial Markets Authority.

Decisions about insurance and banking providers are key decisions for NZ households.  Those decisions carry a financial impact for New Zealanders’ everyday lives.

In 2017, the Royal Commission of Inquiry in Australia looked at misconduct in the Banking, Superannuation and Financial Services Industries.  Several misconduct issues had also unfolded publicly in the United Kingdom and United States.  

In 2018, the FMA and the Reserve Bank established a Conduct and Culture review of the banking and insurance sectors, out of concern to understand whether similar issues existed here in New Zealand.  Our concern was if they did, that would undermine consumer confidence in the New Zealand financial system and be causing harm to everyday kiwis.

Following this review, the FMA has taken 12 fair dealing cases to court, with more than $215 million being repaid to customers of some of our largest banks and insurers, and more than $16 million in penalties awarded against entities

Today we’re joined by Sinead Lloyd, Manager Investigations and Rachael Manttan, Head of Evidence and Investigations at the FMA to tell us about fair dealing, why the FMA considered it is important to look into these issues and take action, and what the learnings are.

Hi Sinead, Hi Rachel.

Rachael, what is a fair dealing case?

Rachael: The fair dealing requirements are contained in the Financial Markets Conduct Act.  They prohibit misleading or deceptive conduct as well as false, misleading or unsubstantiated representations.

In everyday terms, the cases are about a product or a service actually performing in the way it is described, whether that is in marketing material, terms and conditions, policy documents, invoices or other representations an organisation makes.  

Heidi: Can you tell us about the fair dealing cases you have taken?

Rachael: Many of the fair dealing cases we have taken have been about failures to deliver on contractually agreed discounts or fee waivers in the context of core banking and insurance products.  

These are promises the banks and insurance companies make to attract and retain customers based on those customers receiving preferential pricing for bread-and-butter products.

Heidi: What are the FMA’s expectations for financial institutions treating consumers fairly?

Rachael: The fair dealing provisions are fundamental to consumers, businesses and investors having trust and confidence in the financial markets. 

Customers should rightly expect to be treated fairly and that promises made to them will be honoured. 

To support this, we expect financial institutions to invest in quality systems and controls.  Systems should be capable of giving effect to promises that are made to customers about how products and services operate and the benefits they offer.  Systems and controls should have sufficient capability to enable financial institutions to identify issues, find the relevant information the institution holds, and be capable of resolving issues effectively and quickly.  

We also expect that these businesses proactively review their products and services to ensure that they perform in the way they are described.  

Heidi: Sinead, many of the fair dealing cases the FMA has taken have been self-reported. Can you explain what this means? 

Sinead: The context of the joint FMA / Reserve Bank Conduct & Culture review is important.  We asked financial institutions to look for issues that were similar to what emerged in the Royal Commission in Australia and to tell us about problems they were remediating customers for.  Some of the cases we have taken arose from issues noted in these periodic updates.  

Among our minimum expectations for those we supervise, and for good conduct risk management, is that issues and potential breaches should be self-reported to the FMA. This is a sign that entities take their legal and licensing obligations seriously and that they are committed to fixing issues quickly when they arise and putting customers right. We acknowledge when entities have self-reported issues and when they have co-operated with the FMA during an investigation.  We take this into account when we are deciding what an appropriate response is, and in how we approach matters like recommending an appropriate penalty, if there is a court case.  

Heidi: Will we only ever see self-reported fair dealing cases? What about entities that don’t self-report issues? 

Sinead: Self-reporting isn’t the only way for the FMA to become aware of issues. 

Through our CoFI supervisory work we will be looking at firms where there has been limited or no-self reporting in the past. A particular area of interest will be around the content of regular product reviews. These reviews are important to avoid issues of the duration we have seen, where customers have been treated unfairly over long periods of time.  

Listeners can read more about this in FMA’s Financial Conduct Report released in June and on our website, which identifies our regulatory priority areas of focus for the coming year in relation to banks and insurers.

Heidi:  Can you provide some insights into the issues highlighted by the FMA’s investigations? 

Sinead: In some of the cases we have taken, we’ve seen internal documents that show customers making complaints over a period of years, or frontline staff members repeatedly noting issues with systems not working as they should , or staff not being properly trained on the use of the systems – such as the need to manually tick a box to have a discount applied or fee waived.  

 In many of the cases that have been through the Courts, while the individual customer complaining might have been repaid, the financial institution didn’t consider whether the issue was a broader problem affecting its customers or it did not take any steps to investigate that either at the time, or at all until much later.  This meant that issues persisted over many years or even decades, affecting hundreds or thousands of customers, causing harm into the millions of dollars.

In some instances, it was not until well into the FMA’s investigation that entities were able to retrieve information from their internal systems to establish how big an issue was, or for how long it had persisted. And they sometimes only established that information as a result of responding to the FMA’s information requests. 

Heidi: Transparency is important – how are you sharing this publicly?

Sinead: We are increasing our proactive engagement with the industry to share lessons from our response and enforcement work, encouraging financial institutions to consider whether similar issues could arise in their organisation, and to take action where potential issues are identified.  

Your listeners may have also seen the FMA’s media releases about the cases we have taken in this area.  We publish the cases we take to help raise awareness so that customers may be able to spot potential overcharges and raise these issues with their insurer or bank.

Heidi: And finally, Rachael, what do you think the learnings have been for the wider industry?

Rachael: We have spoken about some of these including that legacy systems used by these large institutions have not been capable of effectively implementing the promises made to customers about how products or services will operate.  

 Those same legacy systems have also made it very difficult for financial institutions to retrieve information to enable them to identify when an issue arose, how long it had persisted, what was done (or not done) about it at the time of complaints, and the scale of the problem. In some instances, it took many months or even years for the financial institution to obtain accurate information about these things from their systems.  

Some entities could not retrieve information from their systems, so they were unable to be certain about when an issue first arose, what happened and whether the entity responded at that time.  

Testing products and services shortly after launch, including the User Experience of how those products and services work for the customer, and proactively reviewing this periodically to ensure the performance matches the descriptions, should enable entities to identify issues much earlier and be able to put those issues right.

Utilising in-built system automation as opposed to requiring manual input to give effect to waivers or discounts can reduce the chances of human error.

And finally, acting appropriately when something does go wrong.  We have seen some great examples across the FMA’s work of entities acting thoroughly and quickly when something has gone wrong to investigate and understand the problem, escalate it internally and co-operate with the regulator.  We have also seen examples where that hasn’t happened.  As part of the maturing of the financial services sector and particularly as the CoFI regime has come into effect, this is what we expect of these large well-resourced organisations. 

Heidi: Thanks Rachael and Sinead for talking with us today about fair dealing cases. If you would like more information head to our website www.fma.govt.nz. See you next time.