The Financial Markets Authority (FMA) has published their findings on their monitoring of financial market participants' governance and culture. The report identifies a number of significant breaches of the rules and sets out a number of regulator expectations for governance and conduct frameworks.
Rob Everett, FMA Chief Executive, said some of the issues identified in its monitoring were concerning and he anticipated the regulator would take increasingly strong action where deficiencies are not remedied appropriately or in a timely manner.
The FMA has found weaknesses across its regulated sectors in four main areas:
Governance and Oversight
A widespread lack of understanding of corporate governance among directors. Some directors had a limited knowledge of their entity’s obligations, resulting in a poor ability to oversee the entity’s compliance. Some directors who considered themselves “independent” had a tenure of 15 – 30 years on the board, which the FMA considered compromised their independence.
The FMA expects directors to understand their role and effectively oversee the entity and provide appropriate direction to management.
Conduct and Culture
Generally, there was a lack of board commitment to prioritising customers’ needs and the outcomes they receive from the entities’ products and services. There was no clear understanding of conduct risks and no mechanisms to identify inappropriate conduct. Some entities did not have a vulnerable customer policy, and many had inappropriate policies for handling customer complaints. Particularly worrying for the FMA, inappropriate sales incentives were common, without adequate controls to address the conflict created by the incentive. Entities need to be proactive in remedying conduct issues and risks. The FMA expects that entities assess their business against the principles in the FMA Conduct Guide.
Compliance Assurance Programs
Numerous programs did not meet minimum standards and were poorly designed. Many focused too narrowly on the NZX rules or on the obligations of the parent company rather than the entity itself. In addition, the FMA found the processes and controls in the programs were not being followed as frequently or as described. Entities should review their program to ensure it is fit for purpose and reflects current processes and controls.
Compliance and Controls
The FMA identified several instances where entities failed to comply with their licensing obligations. These included not having the proper policies and controls necessary at the time of licensing, and concerns regarding the experience and skill of directors. All entities must ensure they fully comply with their licence conditions. The FMA has stated that concealed non-compliance or inadequate processes to detect and resolve such issues may result in the FMA taking further regulatory action.
This report signifies the FMA’s commitment to monitoring governance and culture as a strategic priority. It is clear the FMA was disappointed with the governance and conduct frameworks of licensed and authorised entities. The FMA has indicated that where non-compliance continues, further regulatory action may be taken.
Therefore, entities need to remedy any shortfalls in their governance and conduct frameworks the FMA has highlighted in its report, particularly where it risks breaching its obligations under the Financial Markets Conduct Act 2013 or its licence conditions.