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Commission structure may need Govt intervention: FMA

An insurance industry reluctant to move on high upfront commissions may find the Government does it for it, the Financial Markets Authority says.

Wednesday, September 18th 2019, 6:00AM 14 Comments

It and the Reserve Bank yesterday released their response to insurers’ reports on what they planned to do as a result of the regulators’ conduct and culture review of the sector.

The FMA and Reserve Bank said they were disappointed. Some work plans were not deep or broad enough, chief executive Rob Everett said, and even those that were did not make it clear they were committing the resource required to deliver effectively on them.

Between them, insurers identified at least 75,000 customer issues requiring remediation worth at least $1.4 million.

Everett said the FMA remained concerned about high upfront commissions being paid to advisers.

He said insurers who were part of bank groups and sold more of their products directly to consumers had moved more quickly on sales incentives.

Those who paid commission to third-party advisers were proving more of a challenge and there had been no movement from the industry at all, he said.

The regulators had asked insurers to make it clear how they would manage the conflict of interest potential in the model of paying advisers to distribute a product.

“Some turned around and said it’ll all be sorted in the financial advice legislation,” he said.

Everett said while insurers said they understood the issues, they did not want to make a change themselves.

"If they keep saying ‘we’re not willing to contemplate change unless the Government makes us’ that’s exactly what might happen.”

Everett said New Zealand would remove commission “at its peril”, as shown by the Australian and UK experience.

But he said the model needed to be shown to be working properly. “Life insurers aren’t really accepting they have responsibility for how their products are being sold.”

There would be a first-mover disadvantage for the insurer who made the initial move to cut upfront commission, he said. “Advisers will sell through another channel.”

There could be competition issues if the industry banded together to come up with a new model.

“Most people who talk to us acknowledge the model has difficulties and complications but everyone is saying they want the Government to change it, ‘even though we don’t like it either, we’re not willing to change it’. It feels like a lack of industry leadership.”

Financial Services Council chief executive Richard Klipin said improvements were a work in progress. But he said the sector needed to do more, and faster, to improve identified issues.

“Conduct, culture and ensuring great consumer outcomes is paramount. Improvements across the sector remain a work in progress and this latest review from the FMA and Reserve Bank demonstrates that.

“Individual members will now work through their specific issues raised by the FMA and respond appropriately with steps to rectify them.

“It is important to note that there is a lot of work going on across the sector in addition to the regulator processes to improve culture and conduct. This includes the development of an FSC code of conduct, ending overseas conferences and other soft commissions, and strongly supporting the progression of the Financial Services Legislation Amendment Act.

“Good progress has been made in recent months but we need to continue to work with urgency and focus to build the trust of stakeholders and to ensure we are serving New Zealanders in a fair and transparent way.

Commerce Minister Kris Faafoi said the Government was still working on its measures to fast-track improved conduct in the sector and would make an announcement soon.

Tags: Commission FMA Insurance Advisers Kris Faafoi RBNZ Rob Everett

« Insurer response 'not good enough'Advisers feeling overwhelmed by change and scrutiny, group says »

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Comments from our readers

On 18 September 2019 at 8:38 am Eyeinthesky said:
This plays beautifully into the vested interests of banks.
Banks don't pay commissions therefore there is nothing wrong with their conduct or conflicted interests in selling insurance products? Oh really?
They create the products, ergo they make massive profits from them. Remember vertically integrated organisations were one of the Australian Royal Commission's significant concerns.

Kill off the adviser distribution channels and what is the public left with? Banks which proactively sell to their customers.

Obviously financial advisers are regulated and will be more heavily so in the future (For those who survive into the new regime). As such commissions will become more a self limiting issue with conduct, disclosure and conflicts of interest. Insurers are moving to reduce upfront commission already.

Are bank staff still seconded into the FMA and other arms of government, or has that practice been stopped now? With the regulatory capture that has gone on here in the past,it would be interesting to know if there are still bank influences there.

We have a royal commission of enquiry for the Christchurch shooting event, but while banks continue to overcharge and influence government as they have done for decades, rip obscene profits out of our country and send them overseas,regulators and politicians here continue to deny what is obviously a dangerous systemic problem.

Bring on a Royal Commission as happened in Australia. Remember the big players in Aussie control much of our financial system here. The Royal Commission in Australia found fault with the regulators there as well in this whole debacle.

Let's stop behaving like a banana republic and call for accountability for banks, VIO's, Government, politicians, regulators, and politicians.

Transparency and a Royal Commission. New Zealanders deserve it!
But we need to make sure any such commissioner has the same integrity and embraces the tenants of law like Kenneth M Hayne does !
On 18 September 2019 at 8:41 am MediCare said:
I have just completed a number of client reports which include full cross market price comparisons for life insurance. We include the offerings from online insurers and the banks in our report so that clients are fully informed about their choices.

In a competitive market space, the banks and online insurers (who do NOT pay commission) are simply not making the cut.

I can't see what Rob Everett is on about or why commission is a problem from his perspective. Perhaps he would be kind enough to comment about why he feels that incentivizing the hunt for new clients and a fully competitive market place is against the public interest.
On 18 September 2019 at 8:55 am Doggy said:
A fascinating response from a regulatory body that insists it has no sway over commercial contracts between suppliers and distributors. It's the 'solution looking for a problem' broken record, again.
On 18 September 2019 at 9:24 am Skeptical said:
Just want to clarify a couple of points made in the comments here regarding banks.

Whilst they are correct that banks don't pay their staff 'commission', I believe you'll find that banks receive a commission as they whitelabel providers products. The bank in this way act as the advice firm and how they choose to pay their staff doesn't impact the way they are paid by the provider.

Legislating commission will impact banks and I'd argue that the banks would probably just get rid of their life insurance divisions as a result of it being less profitable. I mean, they're already heading that way anyway.

I'm not defending banks and their advice process by any means, I've seen terrible advice being shelled out from them. I personally believe this rampant attack on commission with little to no evidence is doing incredible harm to the entire industry, banks included.
On 18 September 2019 at 9:47 am Ron Flood said:
An importer brings stock in from China. Unit cost $1.99. Sells items for $9.99.
Mark up 400%.
I wish my commission was that good. As at 1 September, my average commission is 138%.
If you start to tamper with commission structures we will be set back 30 years. Advisers will form an association with one company to receive help with office expenses etc.
The FMA should be talking with Russell Hutchinson, who has a great spread sheet showing the difference between advisor sold products vs bank products
If they did one or two of the banks would have to immediately improve their offering. In the case of one bank, I personally feel there life cover is not fit for purpose.
On 18 September 2019 at 12:06 pm dcwhyte said:
The critical issue is the misconception about commission.

I get the remedial measures for provider stuff-ups - all good.

The statement from Rob Everett - "But we do not think high up-front commissions create confidence that insurers and advisers are acting in the best interests of customers" begs the question.

They 'think' but they don't 'know'.

There is no evidence to suggest that high commissions prevent advisers from acting in their clients' interests and with the Code of Conduct and FSLAA about to come into force - at considerable expense to the industry - the apparent obsession with reducing revenue to advisers is destructive and ill-advised.

And 'high' relative to what?

Please don't point to that silly, irrelevant graph with other countries 'commission as a percentage of premium'. These other countries subsidise their tied agency distribution systems at huge cost to consumer retail premiums and to the prejudice of consumer choice.

Also, the statement that "There would be a first-mover disadvantage for the insurer who made the initial move to cut upfront commission, he said. “Advisers will sell through another channel.” - doesn't make sense.

For a start, non-aligned advisers have no other 'channel' through which to offer advice, meet clients' needs, and earn a living.

Second, if commission levels were the only determinant of adviser behaviour, there would be only one company operating in the market, i.e. the highest commission payer. This is clearly not the case and this position displays a serious dearth of understanding within the regulatory authority.

And please don't cite the rubbish produced by the new FMA Board appointee. The document which Consumer produced was no more than a straw poll of subscribers who had already been repeatedly exposed to a set of preconceived conclusions. Consumer has a trivial percentage of the population subscribing and in no way represents either the opinions of the public nor more importantly, of the insured members of the public.

In stark contrast to the drivel published by Ms Chetwin's organisation, the FSC-commissioned report "Moments of Truth" has credible, useful, and authoritative findings supported by robust and thorough research methodology.

In Australia and elsewhere, the reduction in life insurance commission has had a negative effect on consumers' choice through which financial advice can be sourced. The numbers abandoning the provision of life insurance advice in Australia, in particular, are significant.

If we follow the same path, the Government will fail in its objective of making quality advice more accessible to more New Zealanders.

On 18 September 2019 at 2:13 pm dcwhyte said:

To add to the previous post, the article also states - "Insurers that completed the exercise identified at least 75,000 customer issues requiring remediation, with a value of at least $1.4 million."

Unless my arithmetic deserts me, that's an average of $18.67 per customer.

On 18 September 2019 at 2:40 pm RWAW said:
Hmmm lets think this through to a possible conclusion. The Government forces significant commission reductions upon the industry
- The Insurance Companies don't decrease premiums (I stand to be corrected but didn't premiums go up six months after commissions were reduced in Australia)and why would they reduce premiums?
- A raft of highly skilled Advisers that can't eat fresh air for breakfast leave the industry (and the Real Estate Industry has a doubling of IQ overnight)
- new client flows for Insurance Companies dry up
- premiums are increased significantly for those who already have cover due to ongoing claims experience and a shrinking numbers of clients
- International based Insurers decide to vacate the NZ market as it is no longer profitable
- Policy holders of said Companies are left in no mans land
- The Government steps in and appoints Rob Everett as the CEO of the Life Insurance equivalent of Southern Response
- Mr Everett is suddenly called back to the UK due to a family emergency
- He never returns because post Brexit there is no getting out of the UK
- Mr Fafoi and the Government thinks s**t this ain't working so good I/We wish we had just left well enough alone. Pretty far fetched? I hope we never find out.
Cheers, Rohan Welsh

On 18 September 2019 at 5:52 pm Walter Wallcarpet said:
@ David - 75,000 for $1.4 million sounds much more exciting
On 19 September 2019 at 9:50 am Brian Klee said:
I sincerely hope Everett, the Government and the FMA read these valuable comments above....

Well done on the FSC's for their recent publications. I sincerely hope these 'regulators' pay greater attention to this properly researched material, rather than some of this 'paper thin' commentary that's been believed.

If commission is regulated, it will ruin access to independent financial advice for 80% of New Zealanders. They will be forced to charge fees to cover their operational costs. The remaining Adviser force will be once again become 'Sole Agents' - is this clearly understood?
On 19 September 2019 at 11:40 am Seehydenorhair said:
If an average commision is 139% of API (as stated above by and there is a clawback period of say 36 months then the commission is on 46% per annum over the first 3 years plus any trail. Hardly high.
On 19 September 2019 at 2:06 pm Ron Flood said:
Seehydenohair. The figure I mentioned relates solely to my practice. It includes premium discounts I choose to pass on to clients, in lieu of receiving full commission.
An example would be where I pass on a 10% premium discount and receive 100% of the first years premium, rather than 200%

A new advisor would not survive on this level, and should rightfully choose higher levels.
The expense of running an office is not cheap. In my case, this amounts to over $1,500 per week, before I even start to earn a dollar. Add withholding tax and we are up over $3,000.
On 19 September 2019 at 2:38 pm warren.duff said:
I am now in my 62nd year of sales and service to the Life Insurance profession and truly disappointed with the Government interfering with the Profession when there is nothing wrong with the way we do business.

Not even perceived to be wrong. The LUA used to police anything that stepped out of step and it worked well. There must be something wrong with the way the Government attract life offices.

In a few moments I can think of the following who no longer want to do business in NZ and quit.

I wonder why, perhaps Government intervention.

Gone are Colonial Mutual, AMP Society, NML, MLC, T & G, Yorkshire General ,Met Life NZI Life, N. Union Royal to mention a few.

All well established businesses but quit, there has to be a reason for everything and can I say Governm,ent see the Life Industry as a target for something sinister when its not there.

Warren Duff

On 23 September 2019 at 9:57 pm JPHale said:
I concur with my learned colleagues.

I've also said this before, Aussie feels commission is evil and is prepared to prove it is by killing the industry, let's not do that here when we know different.

Two years later, Aussie is killing the advice industry, quite literally with the number of suicides there. And our regulator has picked up the commission bashing baton from our neighbours.

It hasn't worked anywhere else, let's not be the next batch of lemmings to jump off the cliff?

Open invitation, If you have a view commission is evil but you have never worked for commission, come spend a day with me.

Happy to share the insights on what it really means, I'm sure you'll leave happy with your salary and advocating we aren't paid enough.

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