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[The Wrap] What's worse? Commissions on insurance or cashbacks for home loans

Commissions are the hot topic which we just can't get away from. This week we ponder the latest appointment to the FMA board along with some questions around what regulators really want.

Saturday, September 21st 2019, 4:15PM 5 Comments

by Philip Macalister

NBR had this intro to a story Friday: "The appointment of an 'anti-car' blogger to the NZTA board proves transport minister Phil Twyford is the 'weakest link' in the coalition government, transport groups say."

Another version of it could be: "The appointment of an 'anti-commission' advocate to the FMA board proves commerce minister Kris Faafoi is the 'weakest link' in the coalition government, [insert advisers, life companies, professional associations] say."

Ever since we reported that Consumer NZ chief executive Sue Chetwin had been appointed to the FMA board, numerous people in the industry contacted me and said what's going on here/what advice did the minister get?

Yes, there has been a lot of head scratching.

A little point of clarification here; while a little bit of licence has been transposing the names of ministers we're not saying Faafoi has been bad. The general feedback from the industry has been he has done a good job and political commentators consider him one of the better ministers in this administration.

However, one does have to wonder how someone with such strong views on commission can be appointed to the FMA board. How can she objectively consider these issues?

If there is any upside, it maybe that Chetwin has to tone down her rhetoric around commissions when she is wearing her FMA hat.

The other bit which is difficult to reconcile is that Faafoi has been clear that the Government doesn't intend to ban commissions. To do so would decimate the industry and reduce the public's access to advice – one of the underlying principles of the Financial Services Legislation Amendment Act.

However, the regulators seem very anti-commission and want them gone ... well not quite. 

Here's what they told us:

"We haven’t said all commissions drive bad behaviour in life insurance. We’ve identified potential risks with volume-based sales incentives in both banking and insurance and want to be reassured that banks and insurers have good processes in place to ensure customer interests are protected. 

"We have signalled concerns that high up-front commissions (or soft commissions) may lead advisers into a conflict of interest where the customers’ interests are not put first. That’s really our concern: to ensure the customer interest is prioritised."

The point is there is a lack of clarity in the messaging. Throughout the week this is a topic which has been brought up in numerous conversations and there is huge concern about a perceived lack of understanding of how the industry works.

The other point people are making is that life companies and advisers are being unfairly targeted.

An interesting question, which we don't yet have an answer to, is why is it alright for banks to continue paying customers thousands of dollars to take out a home loan? It's clear many borrowers place their business where they can get the biggest cash back.

That's potentially far worse than commissions around life insurance as there is potentially a massive financial risk on customers.

Food for thought.


Tags: Commission FMA Life insurance Opinion The Wrap

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Comments from our readers

On 23 September 2019 at 10:36 am What Charlie Munger said... said:
Commissions dont need to be banned to decimate the industry and reduce the public's access to advice.
The relentless and myopic focus on the wrong participants has already gone a long way to getting that job done. Banning or slashing commissions will simply finish the job.

Cutting and banning commissions on insurance has not reduced premiums anywhere in the world that has tried it. It has not improved trust and confidence - in the Netherlands that number dropped. Fewer people have insurance. And those that can pay fees face ever increasing fees because of less competition and rising compliance costs.

This is not so much a case of the foxes in charge of the hen house - somehow we've ended up with an old hen running a fox hunt.
On 23 September 2019 at 12:26 pm RWAW said:
Great article Phil and thank you for your continued hard work in all of these areas. Perhaps the Regulators statement around commissions says more about them as people than it does about the industry they are trying to murder.

They continually say that this MIGHT lead to that, or this COULD lead to that.

Where is the evidence that it HAS or it DID? As usual from these people there is no evidence or examples of this type of behaviour, or of client's being disadvantaged and their priorities not being put first.

As I said, perhaps these statements are more indicative of how they themselves would behave in a commission based environment! Rohan Welsh
On 23 September 2019 at 9:35 pm JPHale said:
I echo the sentiments of the commenters, great article. The could woulda shoulda measure is fraught at the best of times. And it certainly isn't one the regulator should be leading with.

On the cash backs, I'm stunned this hasn't been put to bed. The basic principles of the secret commissions act, yes there is one, passed in 1977 if my memory serves me, is that it is illegal to pay someone to enter into a contract.

No matter how it is paid, a mortgage is a legal contract and money provided as an inducement to take a mortgage is a secret commission.

The problem is no one is pursuing this and the person receiving the money is the one expected to report it to the authorities...
On 23 September 2019 at 10:33 pm JPHale said:
Sorry team, not 1977, 1910. What's interesting is behaviour by insurance advisers in a similar way would be taken to task, and has been in the past.

There's some interesting bits in this, both as advisers and referrers too. And it's not just cash as has been suggested, but all gifts.

Acceptance of such gifts by agent an offence
Every agent is guilty of an offence who corruptly accepts or obtains, or agrees or offers to accept or attempts to obtain, or solicits from any person, for himself or for any other person, any gift or other consideration as an inducement or reward for doing or forbearing to do, or for having done or forborne to do, any act in relation to the principal’s affairs or business (whether such act is within the scope of the agent’s authority or the course of his employment as agent or not), or for showing or having shown favour or disfavour to any person in relation to the principal’s affairs or business.

Receiving secret reward for procuring contracts an offence
Every person is guilty of an offence who advises any person to enter into a contract with a third person and receives or agrees to receive from that third person, without the knowledge and consent of the person so advised, any gift or consideration as an inducement or reward for the giving of that advice or the procuring of that contract, unless the person giving that advice himself acts as the agent of the third person in entering into the contract, or is to the knowledge of the person so advised the agent of that third person.

For the purposes of this section a person shall be deemed to advise another person to enter into a contract if he makes to that other person any statement or suggestion with intent to induce him to enter into the contract.
On 24 September 2019 at 8:49 am Doggy said:
Let's not forget the bank volume based sales targets imposed on individual Advisers and Head Groups as condition of retaining their accreditation.

These behaviours do not meet the smell test yet banks (BNZ) are all too happy to cast the first stone and abrogate their liability by removing Advisers' choice regarding licencing structure where the Head Group becomes their imposed FAP.

Time for banks to stand up and look at themselves in the mirror.

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