Make commission details publicly available: MBIE

The Ministry of Business, Innovation and Employment (MBIE) has released a discussion document as part of its work to develop the regulations that will fit alongside new financial advice laws.

MBIE said its review work had shown the existing financial advice disclosure rules had a lack of transparency on some factors that influenced financial advice, including commission.

When choosing which provider of financial advice to work with, clients should be able to see details of the adviser's license, client care duties, complaints process, any limitations on the scope or nature of their advice, their fees and commissions.

"We think that consumers will benefit from being aware of these commissions and incentives," MBIE said.

"Having this information will help consumers decide whether to seek advice from a particular person and may lead to a conversation about how these conflicts are managed. Some consumers may wish to seek advice from someone who is not subject to these incentives. It will also help consumers when considering whether to follow the advice given to them."

Once the scope and nature of advice was known, they should receive information about any relevant disciplinary history, details of things such as the number of providers being considered, more detailed information on commissions that could be received and the adviser's insolvency history.

Then, when the recommendation was made, further disclosure would apply, including a confirmation of the commissions paid.

It is proposing more flexibility and a less prescriptive approach to disclosure.

It said AFAs' secondary disclosure statements were currently often too long and complex for consumers to understand.

"A prescriptive approach can provide certainty to the industry and can create documents that make it easier for consumers to compare similar products or services," MBIE said.

"However, given the variety of ways that consumers can access advice in the new regime and the diverse range of activities captured by the definition of financial advice, we are concerned that a similar approach may cause undue compliance costs (e.g. in instances when relatively straight-forward financial advice is being provided), and may lead to a tick-box approach to disclosure."

It said regulations should set out what information needed to be disclosed when but provide flexibility in how that was offered.

Disclosure should provide consumers with the key information they needed, the right information at the right time, information in a way that was accessible, effective disclosure regardless of the channel and it should not impose unnecessary compliance costs, MBIE said.

"I want consumers to make the best decisions they can during their financial planning so ensuring important information is available and easy to understand is crucial. For example, information hidden in fine print isn’t helpful to consumers – that might be information about commissions or incentives that the provider receives, and the fees that will be charged," said Commerce and Consumer Affairs Minister Kris Faafoi.

“Consumers should have that information to assist them to decide, for example, whether to obtain advice from a particular provider. I want to make sure that important information is presented in simple terms that consumers understand."

Comments from our readers

On 11 April 2018 at 10:20 am Dirty Harry said:

Why? Clearly I'm paid plenty even though I can be conflicted and incompetent. I also get travel perks and other ongoing soft benefits and baubles.

Wait: Am I an adviser, or a politician?

On 11 April 2018 at 1:30 pm RWAW said:

This is becoming ridiculous. Do these guys think that Advisers have people beating down their doors to buy Insurance and Investment products?

Whilst good sound advice is essential, these products are sold and not bought and I fear that the BEOT is winning its battle to take over the market. Very sad for consumers then Mr Faafoi.

On 11 April 2018 at 2:59 pm Adviser1 said:

Interesting. What would a bank employed Adviser disclose? That the bank they work for receives commissions of XYZ dollars as the bank owns the insurer but they personally receive a salary, bonuses, company car, have sales targets and will be offering only one insurer's products? Makes sense I guess.

On 11 April 2018 at 3:40 pm Advice Plus said:

From an insurance perspective, if we are to disclose commissions is it not more relevant to the client to disclose the % of their premium that is applicable to commission ie. On the basis that a nil commission premium illustration provides a 20% premium discount then the disclosure is - 20% of the client’s premium is attributed to our remuneration.

How we then negotiate remuneration between the insurer and adviser is not relevant to the client.

e.g (45 year old male approx. $1,500,000 life cover)
If the original premium is $2,000 per annum x 200% commission = Total commission may be $4,000 (rough I know).

However, over the following 4 years the client only contributes $1,899 of their premium towards that remuneration (20%, assuming indexation and premium increases). During this time, they could receive up to four follow-up reviews. These reviews may in fact result in cover being reduced due to changes in circumstances further reducing the clients contribution to the original remuneration.

To make the client feel the adviser has been paid $4,000 for their original advice is an unfair representation of the true cost to the client and not very fair on the adviser either.

On 11 April 2018 at 4:52 pm Dirty Harry said:

Dear Client.
Please find enclosed my Statement of Commission.

In this statement of commission you will be shown how I worked out much I might be paid and how you will be paying me and the date I might be paid.

On page 26 (Insurance Advice) you will see details of how much insurance you need.

If you buy some insurance, I will send you another Statement of Commission that confirms how much I will be paid, how I worked out how much I will be paid and the date that I will get paid.

If the Insurer we select offers special terms that change the price of your cover, or the cover that is eventually implemented varies, I will send you another Statement of Commission that confirms how much I got paid, how I worked out how much I got paid and the date that I got paid.

I trust you will find this information useful when comparing how much I get paid to the teller at your bank, who is paid an undisclosed salary and/or bonus but has to sell you some insurance in order to meet targets and keep their job.

If you subsequently make a claim, please note that I will support you in every way I can, but no Statement of Commission will be issued.

If you decide to cancel your policy I will send you a Final Statement of Commission that confirms how much I gave back, how I worked out how much I gave back and the date that I gave it back.

Sincerely
Your Faithful Adviser.

On 11 April 2018 at 5:25 pm Adviser1 said:

I hope other industries are keeping a close eye on what's going on here. Hate to see what would happen to the NZ economy if commissions were banned in real estate sales.

On 11 April 2018 at 8:15 pm Ron Flood said:

Now that MBIE have called for transperency with regards commission's and incentives it is time to consider what else should come under the same scrutiny.

In particular, the quality of the products being sold by some at the BEOT . Some of the benefits and policy wordings, to put it mildly, are scandalous.

Included in this are policies with 36 month suicide clauses, 6 month income protection benefits, mortgage cover that is cancelled if the mortgage is shifted to another bank and a very limited number of trauma conditions.

At a conference I attended, a local research company presented a table showing the difference in policy benefits between policies sold by Advisers receiving commissions and incentives, and those by bank Advisers. Although the cost of the policies was similar, the quality of the benefits were poles part with adviser sourced benefits far superior in all cases.

If the regulators want consumers to be better informed, it is not the small print hiding commissions and incentives that will cost them at claim time, it will be the poor policy terms and conditions.

On 12 April 2018 at 12:57 pm dcwhyte said:

DH's client letter is clever and amusing - well done.

However, building on the concept for a moment, I'd suggest that every Financial Adviser who receives commission devises a letter of clarification to their clients to explain the remuneration structure.

For example,

"Dear Client,

You may be aware of some recent statements in the media around Adviser Commission and remuneration. I'd lke to take a moment of your time to explain Adviser compensation to you.

As an example, a life insurance policy that charges you $100 per month premium could pay me up to $3048 (200% upfront + 6% (?) renewal over the next 10 years. That equates to $304.80 each year.
By way of comparison, at SBA Accountants, your bill for their services will be $12,000 over 10 years or $1200 per year.

On balance, I believe that I provide excellent value for money and would be happy to discuss the issue further with you if required."

This is only an example, and I suggest you word the letter in whatever way you think appropriate to explain your remuneration to the client.

I then suggest all Advisers send a copy of the text of their letter to the Minister for comment before the form and the wording of disclosure becomes mandated by FMA proclamation or MBIE dictat.

Make commission details publicly available: MBIE

Government officials are suggesting all advisers make publicly available information about the fees they charge and the commissions they receive, so consumers can choose who they want to deal with.

Tuesday, April 10th 2018, 2:17PM 8 Comments

Comments from our readers

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