Following our earlier update in November 2008 on the regulation of insurance brokers, we look at the impact of the Financial Advisers Act 2008 (FAA) and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA) on insurance companies in New Zealand. The Acts form part of a suite of reforms due to be rolled out over the next few years.
Although both Acts have come into existence, they don't come into force until a date yet to be specified, but it is likely to be in 2010.
REGISTRATION UNDER THE FSPA
All legal entities carrying on insurance business in New Zealand (regardless of where the insurer is resident) must be registered under the FSPA with the Registrar of Financial Service Providers (presently the Registrar of Companies). The purpose of registration is to enable:
- The public to access information about the registered entities.
- The Registrar and other regulators to regulate the registered entities.
- The exercise of control over the people appointed to manage the registered entities.
- New Zealand to conform with its obligations under certain international financial protocols.
The Register will be searchable by the public over the Internet and will enable members of the public to:
- Identify registered insurers.
- Obtain their business names and addresses.
- Identify the approved dispute resolution scheme they belong to (see below).
APPROVED DISPUTE RESOLUTION SCHEME
In order to be registered, an insurer must belong to an approved dispute resolution scheme under the FSPA.
The FSPA sets out high-level statutory rules that all approved schemes must adopt. Beyond this, each scheme may have rules specific to the financial industry involved. Many of the statutory rules are similar to the existing rules the Insurance and Savings Ombudsman operates under. For example, the scheme is free to the insured. In addition, the decision is binding on the insurer but the decision is only binding on the insured if the insured accepts it.
Access to the scheme must be available to 'consumers and businesses that have no more than 19 full-time equivalent employees'. This includes non-profit organisations. Interestingly, the statutory rules do not specify any dollar limit. It is for each approved scheme to specify an amount that is 'reasonable and appropriate'.
Dispute resolution schemes must be approved by the Minister responsible for administering the FSPA.
COMPLIANCE WITH THE FAA
The FAA requires a 'natural person' to be registered under the FSPA with the Registrar of Financial Service Providers if in the course of their business and in relation to buying or cancelling an insurance policy they:
- Make a recommendation.
- Give an opinion.
- Give guidance.
All insurance companies are likely to find at least some of their employees' duties are caught by this test. Even employees dealing with insurance brokers may find there is some element of opinion or guidance in their communications. Underwriting agents such as banks will also be caught in the same way.
Alternatively, these natural persons do not need to be registered if they are employees or agents of a 'non-natural entity' (eg a company) that is, itself, registered under the FSPA with the Registrar of Financial Service Providers and that has Qualified Financial Entity (QFE) status (see below).
A registered entity may apply to the Securities Commission to be granted QFE status. Once it is granted that status, it must comply with the terms of the grant, including:
- Ensuring its employees and agents also comply.
- Ensuring those employees and agents who have registered financial adviser status comply with the obligations of that status.
- Filing an annual report with the Commission.
Clearly most insurance companies and underwriting agents will seek this option as it overcomes the need to arrange registration on an employee by employee basis.
PHASES TWO AND THREE
These two Acts are phase one of the regulatory reforms for insurance companies in New Zealand.
Phase two will be the introduction of legislation appointing the Reserve Bank of New Zealand as the regulator of insurance companies, and will set out prudential rules. The Insurance (Prudential Supervision) Bill is expected to be introduced into parliament later this year. Phase three will be the reform of New Zealand's core insurance law in the Insurance Contracts Bill. This Bill is also expected later this year. It is likely to reform the duty of disclosure and address insurance brokers' agency status.
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