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Minister 'encourages' providers to change soft commission structures

Commerce Minister Kris Faafoi says it’s disappointing to hear that the practice of offering trips as sales incentives to financial advisers is still widespread.

Wednesday, May 23rd 2018, 6:00AM 14 Comments

by Susan Edmunds

The Financial Markets Authority last week issued its report on soft commissions, which found that insurers spent $34 million over two years on soft commissions, and half of that was on trips.

There was a pattern of advisers selling more policies in the period before a qualification period for a trip ended.

Faafoi said he was pleased to see some companies changing their behaviour - AMP has axed international trips. "I encourage others to follow suit," Faafoi said.

He said he wanted the Financial Services Legislation Amendment Bill (FSLAB) to ensure anyone giving financial advice would put the consumer’s interests ahead of their own, and comply with a code of conduct.

“I want to see FSLAB improving the disclosure obligations of those offering financial advice so that consumers can make informed financial decisions. Part of the work on improving disclosure will look at addressing soft commissions.”

An issues paper was launched yesterday as part of the review of the insurance contracts law in New Zealand. The FMA had indicated soft commission structures could be addressed as part of that review.

The paper made it clear that adviser incentives are part of its remit.

“The review is being scoped relatively tightly to ensure that progress can be made on the issues that have already been identified,” the paper said.

One of those areas is the conduct of insurers and intermediaries.

“The conduct of insurers and associated intermediaries involved in selling insurance can significantly influence the outcomes for policyholders during the lifecycle of a contract - involving all stages of the contract, from choosing a provider, claims handling, dispute resolution, settlement of a claim and through to the point at which all obligations under the contract have been satisfied. We are therefore also considering any issues relating to the broader question of insurers’ conduct.”

The paper said there had been reports of conduct issues relating to advice, including pressure sales tactics, selling products that are unsuitable for the customer in question and deliberate churn of insurance policies.

It pointed to the Australian experience of high-pressure sales, and Australian and British examples of misselling. It wanted feedback from submitters on whether that was happening here.

“Because there are gaps in regulatory oversight over insurers’ conduct, there are currently limitations in our evidence base from which to identify and assess the issues in New Zealand. Our inquiry into insurers’ conduct is largely driven by the findings of the IMF and the gaps in New Zealand’s regulation of insurers when compared to the International Association of Insurance Supervisors principles.”

Submissions are open until July 13.

Tags: soft commission

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Comments from our readers

On 23 May 2018 at 10:08 am Tash said:
Mr Faafoi. Is a bank allowed to take it's high performing employee financial advisers away, or pay them a bonus, or increase their salary?
On 23 May 2018 at 12:20 pm Barry Read said:
In my opinion this is an example that the powers at be don't understand the difference between financial planning services, financial advice and product advice. Insurance Advisers have to sell insurance and they give product advice when doing it (Which is why the FAA applies). The consumer is not always engaging or paying them for financial advice or a planning service. The problem is the Financial Advisers act and FSLAB doesn't clearly recognise this type of service and is trying to make all advice the same. How is the outcome for consumers any different from a bank or insurance company who spend millions on advertising, branches, staff, incentives to directly sell inferior and more costly products? The focus should be on people/entities whos conduct results in bad outcomes, not how they are paid to market and distribute products. The FMA reports on this subject are light on bad consumer outcomes and hypothesis that it might be bad in some cases, but definitely not in the majority of cases.
On 23 May 2018 at 12:37 pm Adviser1 said:
Well said Barry - the whole thing is looking like a balls up of major proportion.
On 23 May 2018 at 1:06 pm RWAW said:
Well said Barry. As for AMP axing trips this is probably their biggest innovation in 25 years! Given what has transpired with this organisation in Australia recently I think Mr Fafooi is foolish to hold them out as some kind of shining light for others to follow. Or are those Australian outcomes the ones he wants replicated for NZ consumers?
On 24 May 2018 at 1:13 pm wildwest said:
I agree Barry. As an ex banker, I know of many sales incentives and bonuses for staff to sell specific products. It was rare for staff to be rewarded for customer satisfaction or persistency, just sales, and that generally was churned from another bank. While bank staff are aware of the need for products to be suitable and affordable, they do not have the breath of other provider product knowledge to know whether this is the case. I havent seen any corelation between advisers who have been regular recipients of soft commissions and bad outcomes for clients. Is any investigation going to consider the great outcomes for clients who were recommended and accepted suitable insurance products, and have had claims accepted and paid out. I dont think its fair to look at one side without the other.
On 24 May 2018 at 1:59 pm Donald said:
Barry very well summarized, I doubt that sadly Mr Faafoi will get to read your comment. And as for AMP yes I believe 12 advisers not going on trips anymore is not an example worthy of his acknowledging.
On 24 May 2018 at 5:15 pm Murray Weatherston said:
I agree with the sentiments in the second half of your contribution. I wish the insurance companies would grow some and publicly pushback against some of the stuff FMA has been publishing. Their churn report and the soft dollar paper will never rate as works of great scholarship, full of unsubstantiated assertions and opinions as they are.

However its the first part of your comment that I want to address as I think your explanation is quite woolly and actually misleading.

Under FAA, an Insurance Adviser will be giving financial advice (as defined in the Act) when they give a recommendation or opinion about whether to buy hold or sell an insurance policy. If they merely give a service where they discuss personal insurances and stop short of making a product recommendation or opinion, then (unlike an investment adviser) they will not be giving financial advice under the FAA.

The FAA doesn't define financial planning services and product advice at all. If you think it does, please quote me the relevant sections.

FSLAB as she is writ doesn't change that at all as far as I can see.

But under the CWG submission that investment planning service should be replaced by financial planning service, things would change in the following respect. The insurance adviser who stopped short of making a specific product recommendation would now be caught providing "financial advice" - because what CWG's FSLAB would call a "financial planning" service would now capture this.

It's only the CWG who has introduced a distinction between product advice and financial planning - in my view quite erroneously. We at SIFA have pointed out that in fact they only needed to make this distinction because they were going to have two different qualification rules for these two inventions.

There are two limbs of the definition of financial advice in FSLAB - the first where an actual product is recommended (CWG has short-handed this as product advice) and the other where a specific product is not recommended (financial plan). The Chair confirmed at the Auckland meeting that what most reasonable insurance advisers currently do would be caught under both limbs in most cases. It won't matter which limb they're caught under, either or both are financial advice.

In the same way, AFAs don't get hung up currently as to whether they are providing a specific product recommendation or just an investment planning service.

I think lots of people are confused when they they think that somehow financial advice, product advice and financial planning (in the sense CWG is using the term) are somehow mutually exclusive buckets. They are not - they are effectively all the same bucket

On 25 May 2018 at 8:44 am Barry Read said:
Thanks Murray and I agree.

I think the thing that is missing from the FMCA and FAA is a sales/product advice definition that allows product providers and agents of product providers to be able to offer opinions and recommendations when selling products and that consumers should have some responsibility for choosing to get this type of advice from that channel, part caveat emptor. This type of service comes with natural conflicts of interest, which I think consumers are willing to accept if it is clearly disclosed, but is different from a consumer engaging and paying for financial advice/Planning that has little or no conflicts of interest, Cavet Vendor, which seems to be the only option under the proposed model.

On 25 May 2018 at 12:39 pm RiskAdviser said:
Well put Murray and Barry!

Nothing to add other than putting my hand up to say so. FA's AFA or RFA, need to be making more noise in a consistent way. The banks and big end of town are certainly doing so!
On 28 May 2018 at 10:41 am LNF said:
Meanwhile Mr Faafoi rides about in a chauffeur Limo, dining free travelling free gold plate super, all on the Taxpayer and I no doubt thinks it is none of anyone's business and he is entitled
On 28 May 2018 at 12:33 pm alogan said:
I think the focus on "sales" vs "advice" is a red herring. Everybody sells whether you choose to believe it or not and its not just isolated to products. Companies and advisers "sell" their planning processes, needs and modelling tools and value propositions to clients all the time. This isn't about Sales it is about clarifying the service consumers are receiving and if the person providing that service is qualified to do so. "Product" advice and "Planning" advice should be completely separated in the act and advisers should be competent and qualified to give either, or both.

Adviser businesses (Boutique and VIO's) can decide if they want to provide a planning service or product advice, or both, in the Channels they operate in (Mortgage, Risk, Investment etc). If they offer a planning service individual advisers need to be qualified to provide the service. A needs analysis for risk, a retirement plan, or a debt consolidation plan from a mortgage adviser should all be considered "Planning". Consumers should be able to seek out this planning service without having to purchase "Products" from the same provider. They can of course, but the overarching service is a planning service. Then, once the plan is understood, the adviser can elect to give Product advice about which financial instruments would meet the client's needs and why. Consumers can determine for themselves if the list of products and product providers provided by that adviser suits their needs or not or whether they should look at other "product" options.

I think it would be much clearer for consumers if you had;

Investment Planners / Insurance Planners / Mortgage Planners providing Financial Planning Services and
Investment Advisers/ Insurance Advisers / Mortgage Advisers = providing Product advice. If you want to do both, you need to be accredited to do both.
On 28 May 2018 at 5:53 pm Ron Flood said:
Let's get these comments back on track. The article is about soft commissions and, in the opinion of the Minister, the need for them to change. He is staggered by the fact that overseas trips are still widespread.
It is therefore very obvious that unless companies change the way these are promoted, the regulators will take the decision away from them.

We now need to give providers some ideas of how they can change the criteria to qualify for trips, so both the consumer and provider benefit,and more importantly, the Minister can see that the providers are managing these potential conflicts.

So, let me be the first to offer a solution. To qualify for an overseas conference, only extra client premium, or clients who do not currently have any insurance would count.

An example would be someone currently spending $1,500 per year with Company A, changing their insurance programe to Company B but increasing the premium to $2,400. The increase of $900 would qualify for the incentive.

If a client has no current cover, the total premium paid would count towards the incentive.

With the advent of licensing, the requirement to disclose the fact that a client is already paying premiums for cover about to be replaced, could be policed, and anyone trying to circumvent this requirement put on notice. Repeat offenders could be deregistered.

Discussion on who provides advice, sells product etc does nothing to address the Ministers view of soft commissions.
On 30 May 2018 at 1:18 pm MAX62 said:
I agree with Ron that soft commissions are the envy based target of Mr Faafoi and we should push back solely on this issue.
His 7 series Limo is a soft commission by any other name based on his elevation to Cabinet
This was based I hope on his Backbencher performance just as my upcoming trip is based on my top performance as an Adviser!

On 31 May 2018 at 10:50 am RWAW said:
Perhaps Mr Faafoi could ask AMP what premium reductions their clients will enjoy after axing their overseas conferences.
My bet is none.

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