The Financial Markets Authority (“FMA“) has released a proposed guide to “Fair outcomes for consumers and markets” (“guide“). The guide includes 7 “fair outcomes”. FMA plans that the fair outcomes will be the primary guide to its approach to regulation of New Zealand’s financial markets and financial service providers (“FSPs“) in particular. FMA invited submissions on the guide. Cygnus Law’s submission is HERE. A summary of that submission is below.

The essence of the guide is that FSPs are required to treat consumers “fairly”. The guide assumes that what “fair” means is always clear, stating that “We all know what is fair when we see it”. We acknowledge “fairness” is an important concept. However, we don’t consider that “fair outcomes” are an appropriate tool in some areas to guide FMA’s approach to its role. In our view the guide is seeking to impose the fair outcomes as de facto legal standards. We don’t consider that is permitted by law. We propose that the guide should be updated to make it clear that the fair outcomes are aspirational goals and not mandatory requirements, where they are not linked to existing law. If the outcomes are linked to existing laws then the relevant laws should be stated in the guide, to support FSPs to much better understand the function of the fair outcomes.

We do not consider that the “access” section described in the “Consumers have access to appropriate products and services that meet their needs” fair outcome is appropriate.  This seeks to give FMA the ability to intervene in what products and services FSPs provide.  However, no part of financial markets law mandates what products and services should be provided by FSPs.  Rather the law regulates financial products and services that are actually offered to, or purchased by, consumers.  We do not consider that FMA is configured to regulate the financial products and services that should be provided or that it is appropriate to attempt to do so.

We can see no basis whatsoever for the “Consumers receive fair value for money” fair outcome except in relation to misleading and deceptive pricing and KiwiSaver fees.  It essentially seeks to mandate that FSPs set “fair prices”. The fact that the guide attempts to avoid that term via equivalent concepts such as “equity in exchange of value” does not change the essence of what FMA is seeking to achieve. In most areas of law that FMA regulates price setting is not a matter within FMA’s ambit. Price setting and price discovery are a core function of markets. History is littered with examples of misguided and counterproductive attempts to regulate market prices. FMA has provided no cogent validation as to why it is necessary for FMA to get involved in the setting of prices and how that would actually lead to better market outcomes.

The guide does not properly acknowledge the existence and role of other market participants including financial advice providers. By failing to properly acknowledge that the guide will weaken markets, if implemented as proposed. We consider it crucial that the guide acknowledges the important role the financial advice sector plays in financial markets. As part of that a fair outcome should include supporting the growth of the sector and the ability of consumers to get access to financial advice. Our view is that the “Consumers can trust providers to act in their interests” fair outcome should be focused on consumers. It should state as a goal that consumers have access to advice, information and education that helps to improve their financial literacy, decision making and financial outcomes.

We consider that mandating fair outcomes in the manner proposed is not conducive to supporting or encouraging innovation. The imposition of regulation often (but not always) stifles innovation rather than increasing it. The fair outcomes guide is, in effect, another form of regulation. It will further burden FSPs, who have faced a wave of regulation in recent years.  Multiple FSPs have stated new regulations have taken up resources and management time that would otherwise have been focused on other areas including innovation.

FMA has not provided any form of cost/benefit analysis to validate its approach in the guide, which we’d usually expect to see in any initiative to develop de facto legal standards of similar breadth and ambition. We consider that there’s a very real risk that this initiative will impose costs on thousands of FSPs, many of which are already highly regulated, that will exceed the value of resulting benefits to consumers. Those costs will ultimately be borne by consumers.