Financial services is one of New Zealand's most "intensely regulated" sectors
As the financial services sector moves from one regulatory change to the next, some are wondering whether the ongoing flow of amendments, new legislation, and regime overhauls will ever slow down - and the answer is, it likely won’t.
The adviser community will soon be looking to obtain their full licenses in the next step of the FSLAA regime, and banks and non-bank deposit takers have been busy preparing for the COFI Bill and changes to the CCCFA, along with various other changes such as the new Privacy Act.
Commenting on the system of regulation in New Zealand, fintech specialist lead at the FMA Binu Paul said that financial services is certainly one of the more ‘intensely regulated’ sectors in the country, and the method of regulation used has presented both opportunities and challenges. However, given the amount of change being faced by the industry and the country overall, he said that regulation is going to need to keep up with the times - and this means ongoing work on ensuring that everything is working in the best interests of customers.
“It’s fair to say that as a sector, financial services is relatively more intensely regulated, and there’s no getting away from that,” Paul said.
“In an ideal world, it would be nice to be able to say ‘here is a regulatory framework, here’s what you are and aren’t allowed to do - go ahead and do it.’ But the fact is that new technologies are emerging quite rapidly, markets are evolving, and customer expectations are changing - and as a result, how we interact with financial services is changing.”
“The regulatory frameworks the surround that are going to have to change with the times too, meaning regulation is never going to stay in the same place,” he explained.
“It’s going to evolve, and new regulation pieces will come in - for example, climate related disclosure is one that’s coming down the pipe very soon.”
Paul was recently a guest speaker with a group that is looking to introduce more tech-driven solutions to New Zealand’s compliance challenges - RegTech NZ - and he said that there has never been a more opportune time to explore innovation in the regulatory space.
He noted that New Zealand has a ‘twin model’ of regulation, with two agencies - the Reserve Bank of New Zealand and the Financial Markets Authority - responsible for most regulatory oversight and change. They currently use a ‘principles-based’ approach, meaning firms are largely left to set up their processes in any way they see fit, so long as they document their compliance and ensure that ultimate goal of good customer outcomes is demonstrably met.
Paul said while this method gives firms more freedom than a ‘prescriptive’ approach, it can also be more difficult to design technological innovations for. Nonetheless, a number of independent tech firms have sprung up over the past few years, offering solutions specifically geared towards advisers and compliance - and this is an area that RegTech NZ is hoping will be able to develop further.
"Around 2013-15, ‘fintech’ was not a very commonly used word in New Zealand. It took me a couple of years of effort to mobilise the community. So we expect similar challenges now with respect to mobilising the RegTech community, but it’s an opportune time to be doing so."
“Looking around the world at how other jurisdictions approach regulation, and there are two ways to approach it. The first way is quite prescriptive, and that involves a set of rules detailing what you can and can’t do.”
“The second way is the principles-based approach, which is what we have here in New Zealand,” he said.
“That means businesses themselves need to make the call around what they do, and the focus is on what that will mean from the customer’s perspective. What behaviours are you instilling, and what will the outcome be for the customer?”
“From my perspective, that approach is more amenable to innovation, but it also becomes harder to automate and code those frameworks,” he said.
“But ultimately it’s not so much about which approach we take. As long as there is regulation, and as long as that regulation is evolving, then innovation will have a huge role to play.”