Insurers argue cutting commissions will lead to poor customer outcomes

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Product providers and adviser representatives have called for a slower pace of change in the financial services sector and for clarity of what’s expected for advisers in proposed new conduct rules.

Monday, February 3rd 2020, 6:00AM 1 Comment

The Ministry of Business, Innovation and Employment has released submissions made to the options paper it released on the Conduct of Financial Institutions Bill, which is expected to have its first reading shortly after Parliament resumes. 

Many submitters shared similar concerns about what the bill proposes. The bill introduces new conduct obligations for banks, insurers and non-bank deposit takers. It requires that banks, insurers and non-bank deposit takers meet obligations in relation to how they design their incentives for staff and advisers, and although a commission cap has not been included at this stage, MBIE has acknowledged it could mean a reduction in upfront commission.

AIA said in its submission that an element of target-based remuneration was important to maintain productivity and that could be done without prejudicing good customer outcomes.

“As an example, some degree of financial gateway is needed for soft commissions in the nature of business support (such as software licensing, professional development, and business mentoring and coaching). Without a gateway, we may need to either offer these to all advisers (which would be uneconomic) or scale-back the support we provide which encourages good customer outcomes. We are currently trialling a balanced scorecard approach for employed sales related staff using a conduct gateway and good conduct and customer outcome measures as part of the calculation.”

It said restrictions on commission were unnecessary but if the Government had a strong view that commission rates should drop, it should implement a statutory maximum.

“Our view is that the caps in Australia, for example, would be too low to support the structure of the New Zealand advice industry, which is predominately sole adviser practices and, unlike Australia, does not have a large wealth management industry. We are also concerned that a material reduction in initial commissions would create barriers for new advisers entering the market seeking to gradually grow their practice. Another option that could be considered further is the suggestion that trail commissions may only be paid to the servicing adviser.”

Partners Life agreed that without commissions, there could be poor outcomes for consumers who would not seek out life insurance products on their own.

It said that broadly-worded duties could risk removing options to incentivise good behaviours.

“Experience has shown that customers do not wish to pay for advice or have unrealistic expectations of the cost of advice if they were to indicate a willingness to pay for it. In practice, if restrictions on commission rates cause advice fees to be imposed on customers, many customers will be deprived of adequate advice. If the objective is to reduce the incentives for churn or encourage product reviews, there are better ways of achieving this outcome, such as requiring that advisers, who recommend to a customer in person that the customer changes products, must provide a clear written statement of the reasons as to why a product change is in the best interests of the customer, including a comparison of the material differences between the two products which supports that conclusion.”

Financial Advice New Zealand said any shift to a fee-based remuneration structure for advisers would make advice unaffordable for many New Zealanders.

The association said it was concerned that many of the proposals in the bill were similar to those of FLSAA – “which may blur responsibility and accountability between the product providers and the financial adviser”.

“To instigate a new regime for financial institutions before the implementation of FSLAA could seriously add risk to the changing structure of the New Zealand advice sector. If the product provider believes their liability includes duties in relation to the adviser role (due to being unable to distinguish between the duties of the two new Acts as they appear too similar) the unintended consequence will be; access to financial advice is reduced through the departure of the intermediary adviser channel. The provider may consider they need greater oversight of the intermediary adviser channel due to the duties thus reducing the intermediary adviser channel.

“It is fundamentally important there is no duplication of the duties which already apply to advisers and advice under FSLAA. The duties should be limited to duties of product suitability, provision and servicing and allow FSLAA to provide the framework for the duties for advice. There is risk providers will consider they are liable for the advice related duties as the distinction between the two duties is not explicit enough.”

Fidelity Life said the insurer had a responsibility for good conduct in the insurance life cycle but when there were others involved in distribution, there was shared responsibility.

AIA said advisers were best placed to assess a customer’s ongoing needs.

“We believe that an insurer’s role is to reasonably ensure that advisers are competent to distribute its five products and to communicate with customers in a way designed to support a customer’s understanding of the product."

Financial Advice NZ said there was a risk that the industry was being hit with too much new regulation at once.

That was a view shared by the AMP Advisers and Adviser Businesses Association, which said: “Is it premature to be introducing a new range of measures without having allowed sufficient time for all of the other industry changes to have an impact? It could be prudent to allow these to have an impact first before creating another layer of obligations. Over-regulating runs the risk of pushing independence out of the market and creating barriers to entry for new players that ultimately could undermine the access to financial advice for New Zealanders.”

Tags: Commission conduct MoBIE regulation

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