Lawyers have slammed the proposed ‘outcomes-based’ regulatory overlay as vague, utopian, half-baked and off-piste… but otherwise pretty good.
In just-released submissions on the draft Financial Markets Authority (FMA) ‘guide to outcomes-focused regulation’ both Dentons Kensington Swan and Chapman Tripp call for a significant rewrite, or repurposing, of the mooted quasi-rulebook.
The FMA released the guidance last November, defining a new regulatory approach that “puts fair outcomes for consumers and markets at the heart of our work” based around seven principles.
“These fair outcomes are not rules,” the regulator said at the time. “They do not create, replace or even supplement existing legal obligations.”
However, both law firms argue the outcomes-based proposals would impose confusing and expensive rule-like compliance duties on market participants with no legal basis.
“The draft guide is unclear on how outcomes focused regulation actually supports regulatory compliance. This is because the draft guide is too vague to be readily applicable and neglects to tie the high level ‘outcomes’ back to the any actual legal requirements,” the Dentons submission says. “In reality, the draft guide will not and cannot support regulatory compliance at all because, as the guide itself sets out, it does not prescribe any rules. There is nothing to comply with.”
Similarly, the Chapman Tripp response notes the absence of any “clear legislative authority” for the FMA to require the industry to follow the outcomes-based guide.
“Without an underpinning statutory base, some of the Draft Guide lacks the authority of Parliament, and risks being unenforceable, or amendable to judicial review…,” the Chapman Tripp submission says.
“If there is no specific legal requirements underpinning a particular ‘outcome’ then the outcome may not be able to be ‘imposed’ by the FMA.”
Chapman Tripp suggests the guidance requires a major overhaul to clarify the scope and targeted market sector of each proposed outcome while also providing detailed examples of how businesses can comply.
“If implemented, we also consider that the Draft Guide should identify when compliance with existing legislative requirement is sufficient to ensure delivery fair outcomes,” the law firm says.
Dentons also recommends the FMA adds more examples of expected compliance behaviour if the guidance proceeds, as well as scrapping several of the outcomes.
But in general the two legal specialists favour a downgrade of the proposed outcomes-based regulatory approach from a day-to-day compliance concern to a FMA policing principle.
“… we suggest that the Draft Guide should clearly state that the ‘fair outcomes’ approach will be applied to filter FMA’s enforcement decisions, and not as additional matters for financial market participants to ensure are achieved on top of the compliant behaviours required by law,” Chapman Tripp says.
David Ireland, Dentons partner, said, ideally, the FMA would restate the guide as an ‘internal document’, offering the industry insight on how the fair outcomes may apply to regulatory enforcement and monitoring.
“For instance, the FMA might state if any breaches represent a failure against an outcome they might escalate a regulatory action,” Ireland said. “Or if a breach doesn’t cut across any of the outcomes then perhaps there would be no significant enforcement.”
As it stands, though, Ireland said the draft FMA guide reads more like a “think-piece” than a practical manual for industry compliance.
Indeed, Chapman Tripp and Dentons suggest the outcomes proposals represent a regulatory over-reach.
“Rather than attempting to legislate via guidance, which raises its own constitutional and administrative law issues, perhaps the FMA should be advocating for law reform and seek development of an outcomes-based regulatory regime through the appropriate channels,” the Dentons submission says.
On the plus side, Ireland said the draft guidance does at least anchor the debate about regulatory change.
“It’s great that the FMA has tried to articulate what they mean by outcomes-based regulation,” he said.
Chapman Tripp, too, backs the fair outcomes approach – in principle.
“We also support the FMA’s desire to achieve measurable improvements for New Zealanders, by embedding a regulatory approach that puts outcomes for consumers and markets at the heart of its work,” the Chapman Tripp response says.
But as well as calling for a substantial makeover, Chapman Tripp also says the FMA should delay publication of the guidance until after the final Conduct of Financial Institutions (COFI) regulations are in place.
“This would ease the regulatory burden on those financial institutions and allow the FMA to justify the proposed outcomes approach on the current laws.”
Submissions on the FMA outcomes guidance closed early in March: expect more public reviews to come out soon.
