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Advisers, not consumers benefit from soft commissions: FMA

Insurers' soft commissions and sales incentives may be setting advisers up to fail in their obligation to exercise care, diligence and skill for their clients, the Financial Markets Authority says.

Wednesday, May 16th 2018, 3:00PM 11 Comments

by Susan Edmunds

It has released its report into soft commissions.

It follows its investigation into replacement business and insurance “churn” and was in part prompted buy the International Monetary Fund’s assessment of the financial sector in 2017. That report recommended the FMA refine its supervision by enhancing insurance intermediary and insurer regulation and supervision.

The FMA said it was interested in soft commissions because they presented a conflict of interest for advisers, which its earlier work had indicated some advisers were unaware of their need to manage.

The regulator found that insurers offered 242 different instances of soft commissions to advisers over a two-year period.

More than 50% of the $34 million they spent on them was on trips, although they were only 29 of the instances of soft commission and only 800 advisers went on them.

They spent $5.5m on professional development and $3.8m on events for advisers.

The total spend on soft commissions was equal to 9% of the sales revenue that insurers received in the same period from policy sales by advisers.

Nearly half of the soft commissions, and all of the trips, required advisers to meet a target.

One insurer spent $209,000 while another spent $12 million on soft commissions. In one case, a trip to London cost $95,000 for each of the 20 advisers who went. The average value of each trip was $623,000 or $22,000 per adviser.

"Overall we found the financial benefit to insurers from providing soft commissions is small," the FMA said.

"This suggests that there are other non-financial reasons for insurers to continue offering soft commissions to advisers. One potential reason is that it results in increased loyalty from advisers. This is particularly the case where insurers require advisers to place a certain percentage of their business with the insurer to receive the soft commissions. Another potential reason is that insurers pay soft commissions to maintain their market share and competitive position against other insurers.

"We are concerned that insurers are designing incentives that potentially set advisers up to fail in complying with their obligations. Advisers have an obligation to exercise care, diligence and skill and this, in our view, requires adequate management of conflicts of interest. Authorised Financial Advisers (AFAs) also have a code of conduct that they must comply with. Insurers must, for their part, take responsibility for conflicted conduct that results from these incentives."

When one insurer stopped doing trips during the period, its sales fell by a third.

"The FMA expects insurers to consider the number and nature of soft commissions they provide to advisers, to ensure risks to customers from conflicted conduct are minimised.  Based on the information analysed, advisers seem to be the main beneficiaries of the soft commissions provided by insurers - it is difficult to discern any direct benefit to consumers," said FMA direct of regulation Liam Mason.

"However, insurers themselves must acknowledge the need to promote good customer outcomes and take responsibility for conflicted conduct that results from these incentives.”

The FMA will show the findings of the review to MBIE.

Tags: FMA Insurance Advisers

« Education clause 'used too expansively'Soft dollar commissions: What’s the problem? »

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Comments from our readers

On 16 May 2018 at 3:14 pm Richard Pykett said:
Well not on me they didn't...
On 16 May 2018 at 3:35 pm Brian W Brown said:
I confess i attended a company conference in Queenstown for 2 days a couple of years ago but havent been on an overseas trip for over 10 years even though i have been in the business for 33 years.Mind you i dont write a lot of new business as most of my time is spent looking after the clients i already have and the companies i do that for arent
in the habit of rewarding me for that in fact quite the opposite.
On 16 May 2018 at 4:20 pm retired blogger said:
Anyone notice how the FMA and CWG have released a few things this week?

But nothing relating to the Royal Commission in Australia

They wouldn't be trying to change the subject, would they ?

Whilst I don't take commissions at all, the soft commissions of $34 million seem to be trivial compared to the $5 billion (yes Billion) profits that the big four banks have made in NZ recently

and just how did they make such huge profits ?

Perhaps the FMA can provide us with a breakdown of the bank profits

Might be very interesting

And bring the debate back to where it matters

i.e. the establishment of an NZ royal commission
On 16 May 2018 at 4:30 pm Brent Sheather said:
The FMA just keep getting better don't they – they are worried that soft commissions and sales incentives may compromise advisors but they have no problems at all with vertically integrated providers maximising their profitability by recommending their own high-cost products. "The FMA said it was interested in soft commissions because they presented a conflict of interest" but they completely ignore the conflict of interest existing within VIO's. My guess is that this latter conflict is worth 50x as much as the $34m in soft commissions. Again the FMA picks the low hanging fruit but leaves its employment options open.
On 16 May 2018 at 4:58 pm Murray Weatherston said:
Why would FMA measure the cost of soft dollar as a % of only new sales revenue. Could those incentives not also be aimed at maintaining persistence - i.e. keeping existing in force policies which funnily enough also provide premium income (many multiples of the premiums from new policies this year) to the insurers. What would the cost of soft $ be measured vs all premium income.
And how would that % compare with % on rent or communications?
One has to assume insurers don't waste shareholders' money, so why should a regulator seek to control how much an insurer spends on any expenditure classification. We do still live in a free market don't we?
On 16 May 2018 at 5:26 pm Murray Weatherston said:
PS who spent $95,000 per head on 20 advisors to London? = $1.9million.

PPS don't insurers also take their own staff on these trips. Could that not be an incentive to encourage their staff to put in that extra effort?

PPPS which insurer spent the $12 million?
On 16 May 2018 at 7:23 pm Dirty Harry said:
I once sat and watched my Doctor write a script with a Roche pen.
My plumber goes to LA, Vegas, Gold Coast etc courtesy of his suppliers.
My builder owns a much bigger boat than me.
My Vet keeps trying to sell me the most expensive flea treatment and food.
I need to ask all of them about their incentives.
On 16 May 2018 at 8:56 pm Ron Flood said:
I think that it is time for the FMA to hire a decent accountant. They state that "overall we found the financial benefit to insurers from providing soft dollars is small."

Three paragraphs latter it is stated that when one insurer stopped doing trips during the period, it's sales fell by a third.

I would consider this to support the fact that insurers receive much more than a small financial benefit.

That said,I think the time is fast approaching when trips,based on production targets, will become a thing of the past.
On 17 May 2018 at 1:50 pm First Time Caller said:
What would be valuable to know, in relation to the fact they say a "spike" in new business occurs (from the churn report) close to the incentive target date... is if there is in relative increase in replacement business during that period.

As if there is... then possibly a problem... if not then it could just be advisers doing more and helping more people
On 18 May 2018 at 9:03 am LNF said:
I don't see the FMA advising their salary, free morning tea, subsidised superannuation anywhere, let alone the perks they get
Time the Insurance industry grew some balls and told them to pull their head in
On 18 May 2018 at 4:35 pm Accord said:
Maybe the FMA could look at the replacement business at Christmas as well and if they see a spike in activity look to ban that as well.
It seems to me the FMA has too much time on its hands when it is concentrating on a very small part of the industry turnover and expenses.

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