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Crackdown on conduct

New rules for incentives and commissions will be introduced in wide-ranging changes revealed for the insurance and banking sector today, and the Financial Markets Authority will be given the ability to tell banks and insurers how to behave.

Wednesday, September 25th 2019, 12:30PM 8 Comments

Commerce and Consumer Affairs Minister Kris Faafoi has unveiled a new regime to regulate financial conduct.

It follows the Reserve Bank and Financial Markets Authority’s (FMA) review of banks and life insurers, which highlighted concerns in both sectors, including insurers “passing the buck” to advisers on their client care obligations.

“Those reviews by the Reserve Bank of New Zealand and the FMA have also highlighted other problems in the banking and insurance sectors, which include weak systems for managing conduct risks and ensuring good conduct is a priority in their business,” Faafoi said.

“We will soon introduce new legislation to Parliament which will require banks, insurers and other financial service providers to put systems in place to make sure they treat their customers fairly,” he said.

The measures the Government is introducing include a new conduct licensing system for banks, insurers and non-bank deposit takers such as credit unions, the new regime requiring these entities to meet high standards of customer treatment, and a ban on incentives which are based on meeting sales targets.

The ban in sales incentives includes soft commissions, bonuses for selling a certain number of products, leaderboards and performance management based on sales.

There will also be a general obligation for banks, insurers and non-bank deposit takers to consider the risks and harms their remuneration and incentives can create and to design them in a way that is consistent with the fair treatment standard.

Licensed banks and insurers will have to meet a fair treatment standard and implement effective policies and systems. They will be held accountable for sales to consumers by contracted intermediaries who are not financial advice providers, such as car dealers, retailers offering add-on insurance and airlines selling travel insurance.

If they do not meet their obligations, there would be "strong" fines.

“Incentives such as overseas trips or bonuses for selling a certain amount of insurance policies can lead to sales staff pressuring customers into buying unsuitable products, like policies they can never claim on. Removing these types of incentives will provide better protections for consumers from misconduct.

“New Zealanders need to be confident that the financial advice, products and services they are buying will be appropriate to their circumstances and meet their needs,” Faafoi said.

The regime will come with strong enforcement tools, including giving the FMA the ability to direct licensed institutions to change behaviour, improve their systems and processes and suspend or vary the conditions of a licence.

“By taking action to improve conduct, we’re putting the consumer at the centre and helping banks and insurers to restore confidence in their industry. We all benefit from a well-functioning financial sector that’s focussed on the interests and needs of customers,” Faafoi said.

The FMA welcomed the announcement.

Chief executive Rob Everett said the FMA and Reserve Bank had highlighted gaps in the regulation of banks and insurance in their joint thematic reports on conduct and culture in both sectors.

“The Government has said today it intends to close these gaps and give us the mandate to implement and enforce conduct obligations across both sectors.

“We look forward to working with industry to implement any changes passed by Parliament to ensure banks and insurance companies serve the needs of their customers.”

Tags: conduct FMA Kris Faafoi

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Comments from our readers

On 25 September 2019 at 1:02 pm RWAW said:
The Reserve Bank recently advised it was looking at increasing banks requirements for solvency, the banks replied "no problems we will pass this cost on via interest rate hikes to mortgage holders".

The Commerce Commission is looking at interfering in the petrol market, pricing at the pump (most of which is Government taxes) Z Energy comes out and says "no problems, we will close one petrol station a week to make it cost effective".

Now in his infinite wisdom Mr Faafoi has come out and said Insurers do a terrible job, rip off customers and are basically fleabags. Furthermore anyone on commission is deemed untrustworthy in the financial services industry and are obviously just lining their own pockets.

Why don't the major Insurance Companies get together like the banks and the oil companies and advise the Minister, The FMA and the Reserve Bank that their idiotic approach will drive premiums up by 30% and result in less Kiwis having valuable cover in place?

This dog and pony show has gone on long enough.
On 25 September 2019 at 2:07 pm Ron Flood said:
All in all, I see this as a sensible move which should please all market participants.
I agree that trips etc are no longer appropriate and these are gone forever.
What I can't agree with is the absurd and unsubstantiated statement, "Incentives such as overseas trips or bonuses for selling a certain amount of insurance can lead to sales staff pressuring customers into unsuitable policies, like policies they can never claim on"
Unfortunately Kris, you have let yourself down badly.
The only insurance uncovered during the conduct report, where a client was not covered was Consumer Credit and Credit card cover where non residents or non earners couldn't claim. These covers have never been taken into account for advised clients, only Banks and retail outlets. They may have effected internal
bonuses but were never related to trips for Advisers.
On 25 September 2019 at 3:07 pm Majella said:
Great stuff - put into law what has already been self-regulated by the industry anyway. A great example of "Your Tax Dollars At Work".

Now, I'm keen to learn how the building industry manufacturers & distributors will deal with their own 'conduct' issues and ban their bonuses, overseas trips and even free "pizza & pint" nights, based on volume of product on-sold to consumers, at a mark-up of as much as 20%.
On 25 September 2019 at 4:26 pm AdviserMan said:
The reasons given by this Minister, have no factual basis for the Life insurance industry. He, the RB and the FMA have all been asked to show us the evidence of their claims, that bonuses on sales lead to poor outcomes. They refuse to do so, and so the conclusion here is they have a Political agenda being followed. There are many industries in NZ which pay bonuses for sales, for additional work done etc, and as an employer or distributor of any product or service, it is the normal business tool to help motivate staff to produce more, and to grow your business.

Does this mean our exporters can no longer offer volume based bonuses to overseas buyers who agree to take more?

Under this logic, that is exactly what he is saying. Sorry, but this is just stupid.

By removing it, you take away a lot of incentive for anyone to do more than the basic tasks of a job, and this is not healthy for the person at the coal face, or the business.

Any bad behavior which was in place will still be there, it will only drive more people at the top end of the business (the hard working good people) to move away to other industries, where they can be rewarded for extra work.

If the Minister truly believes a bonus is bad, then ban them across all industries in NZ, as if bad for one industry it is surely bad for all Customers of all industries, again show the evidence.
On 26 September 2019 at 1:56 pm LNF said:
They started with the end result that they wanted and worked backwards to justify that end result. As for the huge number of people that lodged complaints, the net result being that the average "issue" was $18.00. Totally proves my point. End result will be a major under insurance problem
On 27 September 2019 at 2:45 pm John Makowem said:
Am I the only one that is battling with the comparison between the building industry and a professional financial/insurance advisor. If you really believe that overseas trips based on volume are a good look and are a necessary "bonus" then I despair for our profession. As it is we receive among the highest upfront commissions in the world. Is it any wonder that we attract regulatory oversight by trying to justify what is unjustifiable in an attempt to squeeze the last drop out of the lemon.
On 27 September 2019 at 4:09 pm JPHale said:
Ladies and gentlemen of the FAP and FA persuasion under the new rules this doesn't ally to us directly.

The Cabinet paper written by MP Faafoi says:

From 44.1 :

Moreover, the majority of the conduct risks and poor outcomes for customers that have been identified to date arise in and originate from banks and insurers. - Hon Kris Faafoi

And for us as advisers:

Mechanisms to address the conduct of intermediaries (Clauses 49 - 58)

• Licensed entities to be accountable for sales made by intermediaries who are NOT subject to new financial advice regime (not under FSLAA like travel agents selling travel insurance)
• Licensed entities NOT to be directly accountable for the advice provided by intermediaries that are subject to financial advice regime. (Us advisers under FAP/FA Arrangements)

Meaning the additional oversight of intermediaries we have been hearing about will not apply to advisers under FAP’s. The FAP will remain responsible not the financial institution providing the products advised.

Notwithstanding the product manufacturer will still be responsible for conduct and culture to ensure good consumer outcomes.
On 9 October 2019 at 10:00 am JPHale said:
@LNF, there's a term used for that often applied to vaccines... Confirmation Bias with a touch of Dunning-Kruger.

One of the challenges of power, power doesn't convey competence but emphasises the impact of Dunning-Kruger, from the perspective of position.

Plenty of anecdotal evidence that there's issues, but no systemic issues from the data presented to date.

However, that's based on what we out here know today. Given much of the identified ’conduct’ risk discussed to date is not covered by present legislation, the regulator has been unable to pursue what in it's opinion is poor behaviour.

This data potentially exists, those who have worked in the providers know it does with certain cases, some of those people now work at the FMA, it has not been published, and has been used behind closed doors to guide the rules we are now seeing. Is it sufficient to call it systemic, I don't know, haven't seen enough of it.

We should not discount that the data potentially exists with the FMA, it has not been published and nor is it required to be released, as it is likely subject to significant commercial sensitivity and impact on the perception of the financial services industry.

Remember the FMA is also tasked with maintaining confidence in the industry. It would be rather reckless presently, or in the past, to come to market with a bunch of data about conduct, without the ability to police it. Far better to stay stom on the subject and maintain the present level of market confidence.

There are many flavours of things at work here, of which we are only seeing parts of. As to data, I can only comment on what I have seen, and aspects of what has been discussed in the market, I have seen subsets of these issues.

As I said isolated cases, or systemic industry issues, I don't know, I would think not given the low incidence rate across the number of people I have seen data on. And do I have this data? or access go it now? no to both questions.

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