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Advisers told: Get ready for major change

Significant change is coming for the life insurance sector this year, after the government vowed to take action on a damning report from the Financial Markets Authority and Reserve Bank.

Wednesday, January 30th 2019, 6:00AM 6 Comments

Kris Faafoi

The report, released on Tuesday, found widespread issues with the sector. Sales were being prioritised over customer outcomes, there was little oversight of adviser behaviour and commission structures had the potential to deliver poor results for clients.

FMA chief executive Rob Everett said the industry needed to fundamentally rethink the incentives given to sales staff and intermediaries.

"In our view high upfront commissions are not acceptable as they drive poor conduct and can result in poor customer outcomes," the report said.

Commerce Minister Kris Faafoi said Cabinet had agreed to get rid of sales incentives in the industry that were driving behaviour that was not in the best interest of consumers.

Asked whether that meant a ban on commission, his office only said: “Advice is being fast-tracked and will be consulted on mid-year.”

Partners Life chief executive Naomi Ballantyne said the report was sad. “That’s what the regulator found about the industry that I love. I agree 100% with their focus on conduct and good outcomes for consumers. I agree that is something that the industry should be held to account for and should be taking seriously. We think we always have.”

She said insurers had not yet received their individual reports about the concerns pertaining to their businesses. “We know we’re not perfect but we think our focus is in the right place.”

Richard Klipin, chief executive of the Financial Services Council, said there would be wholesale change for the industry. “[The report is] a pretty confronting document that shines a light on the sector.”

He said it was too early to tell how adviser businesses would be affected. The whole sector was going through major change, he said, and this was just one component. He said it was not possible to rule out significant change for advisers, though it was also important not to be alarmist. “Whether we are product managers, advisers or service providers, we need to be geared up and ready to face into some fairly significant change.”'

Ballantyne said the issues highlighted around sales incentives and commissions were not new. The new advice regime should address many of the behaviours that were perceived to be created by the incentive structures, she said.

Regulators around the world were grappling with the right remuneration structure and commission level, she said. “our regulator hasn’t given us an answer to that. We are working with them to get an understanding of what is the right outcome in terms of incentivising the right behaviour and more importantly making sure clients still have access to advice.”

Most New Zealanders did not think they needed insurance, she said, and it had to be sold at the recommendation of an adviser, most of whom were not aligned to a product provider.

“You have to work out how you pay for that, otherwise you end end up worse off where no one is selling life insurance and no one is buying it.”

She said she felt where the industry had settled was the already the right solution but was keen to be part of the discussion to determine what would be appropriate in future.

Insurance People head of client engagement Katrina Church was also critical of the commission focus.

“Is it commission that is the issue or is it how commission is given at a level to all even if they clearly do not arrange the minimum of a fact find, a statement of advice, an underwriting process, an audited business replacement process, and a claims support process worthy of acting in the client’s best interest.”

Katrina Shanks, chief executive of Financial Advice NZ, said: "We welcome the suggestion that qualifying criteria for soft commissions be reviewed and are focused on improving customer outcomes – whether for internal staff or intermediaries; this further supports consumer interests. We are supportive of a review of intermediary commissions to ensure the model is relevant and sustainable. It is essential that commission models are in the best interests of consumers, but also ensure that the life insurance advice sector can continue to provide this valuable service to New Zealanders."

Paul Smeaton, chief executive at Asteron Life welcomed the report. “Many of these recommendations will have a substantial impact on the way we do business with advisers and we look forward to working with them as we take steps to improve people’s trust and confidence in our industry.”

Adviser Graeme Lindsay said the report’s criticism of some products such as credit card repayment insurance was valid. But that was not the domain of advisers, who would be challenged if they sold poor products to clients, because of the competitive nature of their industry, he said.

He said the criticism of commission was done with little justification. “The great majority of advisers are doing a fine job for their clients.”

Fidelity Life referred questions to FSC.

Tags: Commission FMA Kris Faafoi RBNZ

« Regulators: Life insurance needs to changeFINANCIAL ADVICE NZ REACTION: Consumer focus welcome »

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Comments from our readers

On 30 January 2019 at 11:36 am Skeptical said:
Hearing our Prime Minister last night say that NZ consumers are paying twice average the OECD commission rates for share of revenue was incredibly disheartening.

I wonder whether she's aware that there was approx $1.2b of health insurance claims last year, that would otherwise likely have to be paid by the Government.

It seems contradictory that there was a theme in the FMA's report of increasing customer confidence in the industry by releasing a report that in an evening has shattered public confidence.

On 31 January 2019 at 7:51 am smitty said:
Any government will take the opportunity to grab a headline to promote their own interests, their care for society, what ever it may be to support their means.

The truth is though, and commission rates dont lie - we are paying twice the average. If that is the case due to other costs that advisers pay, then promote that, show the true cost and income for an Adviser.

Unfortunately, that doesn't bundle too well into a headline.

I'm looking forward to when they begin delving into the commission rates for Real Estate agents, or perhaps Mortgage brokers. The Insurance Council, etc... should be front footing this and getting the message out about claims, about the successes... haven't seen it yet on mainstream media, why is that?
On 31 January 2019 at 1:59 pm MPT Heretic said:
A change to commission structures might be making all the headlines but I wonder if it is all going to be a moot point. Elsewhere in the report the officials have decided that insurers will be responsible for ensuring any policy is appropriate for a client at point of sale.... and that it remains appropriate into the future! Cant see many directors willing to take on that liability by selling via independents, so salaried internal advisers it will be.
It will be interesting to see if the regulators decide that a similar obligation should be in place for KiwiSaver providers. Cant see how many of their directors would have a clue as to whether their KS fund remains the best option for an investor.
On 31 January 2019 at 2:29 pm Tash said:
making insurers who only distribute via independent advisers liable for ensuring a policy is appropriate for a client is like saying the pharmacist is liable for the doctors prescription!
Watch out fund managers!
On 31 January 2019 at 4:19 pm JPHale said:
Smitty, on the face of it yes. However, when you do a real comparison to other markets its a little too simplistic.

Sure play with quote software and back out the comms component, it gives you one view.

But it doesn't show the funds offshore insurers spend on adviser infrastructure that isn't in the form of commission.

Easy to have lower commission rates when the insurer is paying all the other office and staff costs. Which is the core difference when trying to compare rates. Secondly it shows nothing about other sales and marketing activities, which direct providers also spend money on at similar levels with similar premiums.

If what the government is saying is true and realistic, then pinnical life should be our largest life insurer.

The fact is they are not and the metrics suggested have little basis in reality.

But let's not let a good story get in the way of the facts.

RBNZ is supporting their banking buddies, the same organisations that had a scathing insurance review report, 30% against 3% for advisers on the harm scale.

Sure commission and incentives are causing issues, as it is not demonstrated by the reports from the regulator...
On 1 February 2019 at 8:29 am Rob Thumath said:
At the end of the day the insurance companies are businesses that are looking for shareholder return.

I would suggest that the reason they employ commission only advisors is because it in fact lowers their overall average cost of acquisition in comparison with bricks and mortar and staff costs.

Suggestions that lowering commissions will reduce insurance premiums has no basis in reality.

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