Conduct of Financial Institutions (CoFI) legislation

The CoFI regime requires registered banks, licensed insurers and licensed non-bank deposit takers to: 

• be licensed by the FMA in respect of their conduct towards consumers; and 
• comply with a “fair conduct principle” to treat consumers fairly, through the requirement for financial institutions to establish, maintain and implement a “fair conduct programme” (FCP) and take all reasonable steps to comply with the programme; and 
• comply with regulations that ban target-based sales incentives, and regulate other types of incentives. 

The “fair conduct principle” will apply whenever a financial institution: 

• designs services and products for consumers 
• offers to provide those services and products 
• provides those services and products 
• has any dealings or interactions with a consumer in relation to its services or products, eg responding to a complaint or handling a claim 

The fair conduct principle is the overarching principle of CoFI that a financial institution must treat consumers fairly. The requirement to treat consumers fairly includes:  

• paying due regard to their interests 
• acting ethically, transparently and in good faith 
• assisting consumers to make informed decisions 
• ensuring the services and products that the financial institution provides are likely to meet the requirements and objectives of likely consumers 
• not subjecting consumers to unfair pressure or tactics or undue influence. 

From the start of the CoFI regime (31 March 2025), any registered bank, licensed insurer, or licensed non-bank deposit taker in the business of providing one or more relevant services will need to hold a financial institution licence to continue operating, if that service is received by a consumer in New Zealand.

This means a financial institution that is in New Zealand but only provides relevant services or associated products to consumers outside New Zealand will not need to hold or operate under a financial institution licence. 

The following diagram is a useful tool you can use to determine whether you require a financial institution licence.  

Please refer to the useful links below for resources to assist with applying for a financial institution licence.   

From the start of the CoFI regime (on 31 March 2025), any registered bank, licensed insurer or licensed non-bank deposit taker in the business of providing one or more relevant services will need to hold a financial institution licence to continue operating, if that service is received by a consumer in New Zealand.  

This means a financial institution that is in New Zealand but only provides relevant services or associated products to consumers outside New Zealand will not need to hold or operate under a financial institution licence. 

Read more about licensing in the CoFI regime

A Fair Conduct Programme (FCP) means effective policies, processes, systems and controls that are designed to ensure the financial institution’s compliance with the fair conduct principle. 

Read more about the FCP

I am an intermediary advising SMEs (small and medium businesses) on financial services. Do incentives payments to me by a financial institution in relation to SMEs fall within the scope of the incentives prohibitions?

The incentives prohibitions do not apply to incentives payments received by an intermediary from a financial institution in relation to non-consumers. We set out more information below about how this relates to intermediaries providing advice on different products and services.

Insurance contracts other than life and health: When an insurer provides ‘general’ insurance contracts, the ‘consumer’ test that CoFI applies is whether the policyholder is entering into the contract for personal, domestic, or household purposes. Because SMEs enter into general insurance contracts for business purposes, they are not treated as consumers. This means that incentives payments received by an intermediary from a financial institution for the intermediary’s involvement in providing general insurance contracts to SMEs do not fall within the scope of the incentives prohibitions.

Life and health insurance contracts: The position is different for insurers providing life or health insurance contracts. A ‘consumer’ is defined as any policyholder under a life or health insurance contract. This would include SMEs and larger corporates because a corporate policyholder of a group insurance scheme is treated as a ‘consumer’. This means that any incentives payments received by an intermediary from an insurer for the intermediary’s involvement in providing life or health insurance contracts to SMEs do fall within the scope of the incentives prohibitions.

Other financial services: CoFI applies a different ‘consumer’ test for the provision of financial services other than insurance or lending. This includes the provision of financial adviser services. The ‘consumer’ test that CoFI applies is whether the person receives the services as a ‘retail client’ – and this includes SMEs with net assets/turnover less than $5 million. However, this consumer test is only applied when a financial institution provides financial adviser services. Put another way, the ‘consumer’ test that CoFI applies is based on the services that the financial institution provides, rather than the services that the intermediary provides.

Do the incentives prohibitions apply to payments that relate to persons who are not consumers?

The incentives prohibitions do not apply to incentives payments by a financial institution or an intermediary that relate to services or products provided solely to persons who are not consumers. See Key Terms under the CoFI regime which sets out the definition of ‘consumer’.

Is a persistency bonus a prohibited incentive?

Yes. A persistency bonus is a payment or increase in commission for an employee of a financial institution or intermediary if a certain percentage of products have not been cancelled within a set period. For example, an employee is given a bonus if 85% of life insurance policies sold in the past three years have not been cancelled.

Persistency bonuses of this nature are a ‘prohibited incentive’ (reg 237E), as they involve a target or threshold based on volume or value of sales. We note the definition of ‘incentive’ expressly recognises that a payment for avoiding or preventing something – such as persuading a consumer not to cancel a product - can be an incentive (section 446M(3)(f) of the FMC Act).

Is a clawback a prohibited incentive? 

No. Clawbacks occur when pay or commission already earnt is fully or partly clawed back (ie. required to be repaid) from the employee of a financial institution or an intermediary, such as an adviser, in certain circumstances. For example, when a consumer cancels their insurance policy or refinances their loan to another mortgage provider within a specified period after the sale of the product. 

A clawback is not a commission, benefit or other incentive that is ‘offered’ or ‘given’ to the employee of a financial institution or intermediary. Instead, a clawback is an amount that is ‘taken’ or repaid. This does not fall within the definition of ‘incentive’ in section 446M (and so is not a ‘prohibited incentive’ under reg 237E). 

We remind institutions and intermediaries that the overarching obligation to treat consumers fairly continues to apply and that advisers have an obligation to give priority to client’s interests.

The CoFI Act has introduced some key terms to describe the framework for regulating the conduct of financial institutions in New Zealand. Read through the list of most common terms and their explanation.

Read the key terms under the CoFI Act