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FMA: We're putting life advisers on notice

FMA releases Churn Report: It says New Zealand’s system of high upfront insurance commissions needs to change.

Thursday, March 22nd 2018, 12:00PM 9 Comments

by Susan Edmunds

It has been working on a project examining life insurance churn since 2016, in which it selected 24 advisers identified as having high levels of replacement business, and investigated them more closely.

Four have been given private warnings.

The FMA found that half the advisers it talked to were either not aware of their obligation under the Financial Advisers Act to exercise care, diligence and skill, or they were in breach of it.

Advisers were poor at keeping records for the benefit of clients and most of the advisers failed to recognise that insurers’ incentives to sell products created a conflict with the interests of their clients.

The FMA said it was worried that advisers were earning up to 230% commission for placing new business and qualifying for overseas trips – if clients were being moved unnecessarily, it could put them in a vulnerable position.

“The failure to exercise care, diligence and skill for their clients was a consistent finding in our review of 24 advisers. Among the 24 advisers who were subjects of this round of inquiries, it was both striking and concerning that many of them did not even recognise that conflicts of interests can arise from incentives and commission,” said FMA director of regulation Liam Mason.

He said the results were unexpected. “It’s hard to manage a conflict of interest if you don’t know it’s there.”

In one case, a clear peak in sales was shown before the qualifying cut-off for overseas trips.   “Incentives are put in place because they work,” Mason said.

He said insurance had an unusually high upfront commission model.

“That’s something that providers put in place and we see advisers respond to. One of the things we’d like to see is the providers themselves taking a lot at the model and whether there’s a way to reward good advice and not necessarily a model that’s quite so much about rewarding changing policies.”

He said the balance of incentives would change under the new financial advice laws coming into effect with the Financial Services Legislation Amendment Bill. RFAs will find an obligation to put client interests first could make some situations hard to manage, he said.

“That will at least encourage reflection and examination of the model in play and we hope will be enough to create change.”

A review of the insurance contract law would also be another opportunity to look at insurer conduct, he said. “Whether there’s a case for different regulation of the providers themselves.”

He said most of the advisers were RFAs and it was the first time many had had contact with the FMA, so warnings and a report were the most proportionate response.

Mason said the FMA wanted to point out this was not a representative sample of all advisers. “We are not saying this is what insurance advisers are like but there’s enough commonality to think there are things here for all advisers to look at.”

A purpose of the report was to put advisers on notice that the FMA was going continue to look at this area. “There’s nothing here that has made us more comfortable.”

The FMA also issued compliance letters to six registered financial advisers and one authorised financial adviser. Inquiries into three authorised financial advisers remain ongoing. Two registered financial advisers are also subject to ongoing inquiries for other conduct reasons unrelated to the replacement business review.

It is also conducting work on replacement sales processes in QFEs.

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Tags: Churn FMA

« Insurers: Disclosure rules should help clients'Not all advisers churning' »

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Comments from our readers

On 22 March 2018 at 1:59 pm MAX62 said:
The real issue regarding churn and one the FMA chooses to ignore is not remuneration but the outcomes of replaced benefits that disadvantage the client.
This is a free market economy and interfering with a companies choice of remuneration or a least attempting to does pose the question why?


On 22 March 2018 at 2:31 pm AFA Muggins said:
Good work on the part of the FMA. The full report makes interesting reading.

"It is also conducting work on replacement sales processes in QFEs"

from the report - "Our Strategic Risk Outlook (SRO) highlights the risks and harms associated with conflicted conduct across all financial services".

I hope the attention given to the QFEs is as rigorous as the work done on RFAs / AFAs
On 22 March 2018 at 3:18 pm Pragmatic said:
Good work FMA
On 23 March 2018 at 8:46 am Do what is right said:
Those advisers who have been actively churning should be named. Legislation was partly created to move these people out of this industry. So now we need to expose these people to get them out of our industry so the rest of us can continue to build a credible name for advisers
On 23 March 2018 at 11:07 am T said:
Hmm somewhat frustrating as no real action against these advisers, no clear comments as to how advisers make it clear that our conflicts did not influence us (and yes we all have conflicts) understand not naming them but potentially makes clients wonder is it my adviser.
I very rarely move business too scared about potential risk of non disclosure, however, I guess I could be questioned that I am not doing the right job if there is a more comprehensive policy out there and I haven't at least mentioned it.
Interesting in the Herald article "He urged those not happy with their advice to contact the FMA or the dispute resolution provider for the adviser." I had thought the FMA imposed complaint procedure for advisers was that clients were to come to us advisers first not FMA or the dispute company?
On 23 March 2018 at 11:13 am Mike Naylor said:
Conclusion - Insurers drop their 'unusual upfront commission model' or the govt does it for them. How much more clear does the message have to be before the insurers act?
Advisers are in a no-win situation, as high commissions are a bad look even if advisers act ethically. NZ advisers need to push insurers to reform their commission model - now, 2018, no more useless talk.
On 23 March 2018 at 1:48 pm Backstage said:
Who is getting 230% every time i read this stuff commission gets higher what is it next week 500%. A very small number of people were possibly acting badly and Mike again leaps to lets ban commissions. Why dont we just tell the clients what we get in our disclosure statements... they can decide whether that is ok. What we dont need are academics and politician and not properly qualified public servants dictating. Collaboration would be good starting again with the client first and get rid of all the nonsense assumptions. In the excercise above the FMA just wanted advisers to know the new sheriff is in town... well why dont we all get to know each other well and understand all of our individual challenges. Dont need chicken little running about going ban commissions, ban commissions!
On 26 March 2018 at 9:10 am dcwhyte said:
@Mike - any suggestion of insurers acting in concert to adjust commission structures will attract the attention of the Commerce Commission. At a time when advisers are facing ever-increasing compliance costs, and FSLAB is looking to increase consumer access to financial advice, forcing changes to remuneration would have a negative impact.
On 3 April 2018 at 5:45 pm Murray Weatherston said:
A question for the lawyers who read this.
On 12 occasions in the Report FMA declared that advisers had breached the statutory duty in the Financial Advisers Act to act with care diligence and skill.
But there have no no Court cases taken by the FMA or Crown on the matter, and I am not aware of any civil cases where the Court has found against an adviser.
So how can the FMA state unequivocally that individual advisers have breached the duty? They can allege, yes. But determine, I wouldn't have thought so.

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