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Lines drawn in commissions debate

There is general support for insurance advisers being paid commissions, but debate about whether there should be restrictions on how much they get, submissions made to the Financial Advisers Act review show.

Thursday, October 15th 2015, 6:00AM

by Susan Edmunds

MBIE has made public the submissions it received in response to the review issues paper.

The paper asked whether commissions should be restricted or banned, and whether the disclosure requirements on advisers were sufficient. New rules in Australia have slashed the amount of upfront commission that can be paid there.

Some respondents urged similar restrictions in New Zealand.

BNZ said it supported tougher rules but a transition period would be necessary to ensure consumers still had access to insurance.

AMP said New Zealand was an  international outlier with initial commission up to 200% in the first year. “Our calculations indicate that premiums are inflated by up to 30% in NZ compared to Australia, largely, we believe, as a result of higher commission levels. With commissions at these levels we have little sympathy for those in the industry who raise the cost of compliance as arguments against regulation," it said.

“Our analysis shows that the adoption of a flat 20% commission model as is standard in the general insurance sector, would allow prices to be 10% cheaper than current. And this is before allowing for the potential consequent impact of reduced churn, which would allow prices to be pitched even lower."

Training and compliance firm Strategi also urged controls.

It said no more than 60% of annual premium income (API) should be paid upfront.

"Commissions need to be fully disclosed. If they were banned then advisers would have to charge all clients fees and this would deter those who most need the advice from receiving it. If commissions were retained then there should be a mandatory warning with all commissionable products that warns that commissions can cause bias and that it is recommended the adviser charge the client a fee," Strategi said.

Former Institute of Financial Advisers president Nigel Tate suggested a cap of 25% of API.

But others said no action was necessary.

Westpac said there was insufficient evidence commissions were harmful.

Former PAA president Peter Leitch said advisers had worked on commission for generations and their advice had not been any less relevant because of the remuneration structure they used.

Partners Life also threw its weight behind the argument for commissions.

"Commissions provide a necessary function within the industry that cannot be adequately substituted by other forms of remuneration,” it said.

“Commission structures enable advisers to remain independent from product providers, so restrictions could cause advisers to stop offering such advice, ultimately leading to a lessening of competition in the market and an increase in the existing under-insurance gap."

But it said there was a case for restricting advisers who wrote replacement business to level commission only. 

Most agreed disclosure requirements could be improved, particularly to eliminate the different rules for registered and authorised advisers.

Sovereign was one arguing for consistency. 

"When they sell category two products, AFAs and RFAs do not have the same commission disclosure requirements. Sovereign believes this unevenness provides a mechanism that could encourage inappropriate churn. Anecdotally, we have heard of instances of AFAs becoming RFAs to take advantage of the reduced disclosure requirements."

Partners Life said advisers should be required to disclose anything that could reasonably be expected to "materially influence" the advice being provided to the consumer.

That would include whether there were any obligations to place a set amount of business with a provider, which providers the adviser was able to deal with, what research they used and the difference in commission between advisers.

Tags: Commission Financial Advisers Act

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