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National questions limits on adviser incentives

National MPs have questioned the need for a bill that brings in new conduct requirements for insurers, banks and non-bank deposit takers.

Friday, February 14th 2020, 5:00AM 7 Comments

It passed its first reading yesterday and will likely force insurers to monitor their adviser distribution channels more closely.

Commerce and Consumer Affairs Minister Kris Faafoi said conflicted remuneration and incentives were one of the biggest issues driving poor outcomes for consumers in the financial sector.

The bill will allow regulations to be set to govern those.

"The bill will also create the ability to prescribe regulations relating to incentives which financial institutions and their intermediaries will be required to comply with," Faafoi said when he spoke in support of the bill.

"These regulations will be the mechanism through which sales incentives based on volume and value targets will be prohibited, and this prohibition applies not just to licensed entities but also to all intermediaries throughout the supply chain. It's also about any and all incentives, whether monetary, such as commissions, bonuses, or other non-monetary rewards like leader boards or trips abroad."

But National MP Brett Hudson said his party would not support the bill in its current form.

Reports by the Financial Markets Authority and Reserve Bank had not shown instances of bad behaviour, he said, and FSLAA had introduced a simple way of dealing with the same matters this bill sought to address.

"I also want to spend some time on ... this regulation-making power, which the Minister's own words tells us pretty strongly is all about banning incentives," he said.

"Well, first problem is it's simply a blanket regulation-making power, which means that if we agree to this, then the Minister and their officials will fundamentally be able to decide at their whim what incentives can be curtailed or banned, what roles they can apply to at any time – any time at all. So it's signing a very blank cheque for that sort of power-making to what, in effect, is officials, because this Government won't argue with their officials on these sorts of matters.

"How are these businesses going to transact if they don't have people actually selling their wares to customers? It's how businesses operate. Whether they're a product business or a services-based business, someone's actually got to sell the offering to the client or customer.

"The reality is the people that put themselves in that position as salespeople tend to be people that value the risk and reward that comes with being successful. They tend to sacrifice some salary up front with the possibility of overachieving if they deliver against a set of sales targets – all of which should be and normally is managed by controls across the business.

"The Minister tonight said that the sales incentives they want to ban are the ones that are based on volume or value ... I challenge anyone to name me a sales incentive that is not either based on value of sale, or sales, or volume. It's fundamental. So if his intention is to ban sales incentives to do with volume or value, he's basically just said to us all his intention is to ban every sales incentive he possibly can. It's ludicrous."

Labour MP Deborah Russell argued there was a balance to strike.

"At what point does a commission provide an incentive, so that instead of selling the customer a product they genuinely need or a product that will genuinely serve them, the real service that is performed is the commission that is paid to the sales agent? That's a very tricky point to judge.

"Now, this bill does not set out to make that judgment in itself, but it does require institutions to set up rules for themselves as to how they will conduct themselves to set up understandings in institutions as to what is a reasonable way to remunerate sales staff and what is not. I think it is worth remembering that in terms of these so-called sales staff, in some institutions these are bank tellers. They are financial advisers. Their objective is to help a customer or a client to structure their finances as best possible, but their advice is being skewed by the presence of a commission. So how do we get institutions to regulate that? Well, we invite them to think about them themselves, and this is what this bill does."

Her colleague Greg O'Connor said he was chair of a mortgage company when the lending margin was 400 percentage points.

When that margin dropped, pressure went on to offer other products such as life insurance, he said, to maintain profitability.

"And what quickly became clear was that we were going to have to incentivise a lot of people for us to make any money and the only people who were going to suffer were going to be our customers. So we exited. So I have a firsthand account or experience of that change in incentive."

He said there was no reason to think that bad behaviour that had been found in Australia had not happened here.

There were 63 votes in favour of the bill and 57 against. The Finance and Expenditure Committee will report back by June 23.

Tags: conduct insurance Kris Faafoi regulation

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Comments from our readers

On 13 February 2020 at 1:59 pm dcwhyte said:
Point of order and please correct me if I'm wrong but in the Minister's opening remarks to the FSC event, he said that such incentives "CAN drive poor outcomes for consumers".

The item here suggests that the Minister stated that these incentives ARE producing poor outcomes.

Neither FMA nor RBNZ - nor any other source for that matter - has produced any substantive evidence of any significance to suggest that consumers have suffered, or are suffering, poor outcomes caused by the incenctives- not through the Independent Adviser channel.

I'm not defending incentives - merely pointing to the lack of credible research-based evidence to support the assumptions related by the Minister, Ministry Officials, and regulators and, of course, our dear friends in the mainstream media who never miss an opportunity to jump on the bandwagon. After all, why let the facts get in the way of a good industry-bashing article?

Perhaps if those who are charged with advising the Minister consulted with Andrew Inwood of CoreData, they would be able to deliver evidence-based facts rather then supposition, hearsay, and anecdote.
On 13 February 2020 at 2:45 pm All hat no cattle said:
I absolutely and completely agree with Deborah Russell on this point: It's a tricky point to judge.
If we all just look past her cute Poli-splaining of conflicts of interest, we can see she has bought right into a concerning anti-commissions narrative.
But are fees for service the answer? Are they really immune from being conflicted?
I fired my accountant a few years back because he delivered substantially less service than I expected for the fees I paid. He thought he had done more than enough for what he charged. Fact is he had every reason to do as little as possible while charging as much as possible. Or in a more extreme example there is AMP in Australia who got caught charging fees for doing absolutely nothing!

Now, who is this Brett Hudson dude?
I'd liek to buy him a beer.


If I can afford it.
On 13 February 2020 at 3:13 pm JPHale said:
%&$#@%$ Really...

When these numpties can come and walk in our shoes for a day they may gain some perspective until then it's a pissing contest in a thunder storm. Hopeless!

Sitting on a board complaining about revenue and looking for margin and deciding that insurance is a good idea, bears little resemblance to the reality of a life insurance adviser.

Mortgage advisers 'adding value' by offering insurance did help prop up mortgage business balance sheets at the time, and some cover is also better than no cover.

And at the same time (I was a BDM at the time) professional life advisers were complaining about the lack of quality in the advice that was being given by mortgage brokers, and rightly so from their perspective.

The governments (MP Faafoi) and the code working groups perspective, in the discussion I have directly had, has been the bank products are better than nothing, and sometimes they are the right answer for the desired need, as too that some cover is useful while waiting for a professional adviser to do the full job on risk assessment.

And mortgage brokers doing insurance fit in the middle of this, typically (not all) doing the job of the bank with adviser quality products.

Don't misunderstand me in speaking generally, there are good mortgage brokers that do give good risk advice too.

The whole commission incentives debate is a load of crap that has been done to death by people who do not understand the industry.

Russell Hutchison had some good points on external to the industry views in his recent money blog post too.



On 14 February 2020 at 9:31 am Doggy said:
The Minister appears to be finally acknowledging what we've been saying all along. At the end of the day this ideologically driven agenda to extinguish the 'evil' commission model will only result in fewer people getting what they need.

@dcwhyte, we may be waiting a wee while for any empirical evidence when no-one can even define a 'good customer outcome'.
On 14 February 2020 at 10:23 am w k said:
@doggy: "we may be waiting a wee while for any empirical evidence when no-one can even define a 'good customer outcome", come 2022, regulation regime 2.0 may make it compulsory for all advisers to have a degree in behavioral psychology to enable advisers to appease customers. just saying.
On 14 February 2020 at 1:45 pm JPHale said:
Ruminating on this there’s a point here that is an own goal by Greg O’Connor.

So as a board member he was involved in deciding to implement life insurance into the mortgage business he was involved in.

The decision was to get, at the time, unqualified advisers to flog products to customers to prop up the bottom line.

This has nothing to do with commission, but the ethical decisions of the organisation driven by financial returns and outcomes for the shareholders.

It has been determined that people should be paid for the work they do, commissions or otherwise.

If it had been fees, or some other form of funding for the distribution of the life policies, the issue remains the same for the decision Greg’s board made, and they would have likely still made that same decision.

In one foul swoop Greg O’Connor in one statement has justified why we need both the FSLAA changes and the culture and conduct changes.

His comments amount to confessing to making unethical decisions driven by financial returns by a potentially desperate company to flog products that may or may not be suitable to the general public, aka the consumer.

The discussion on commission is a deflection by all to avoid the hard truth that many business practices don’t meet the requirements of good customer outcomes. And it is not the commission that drives that in the slightest bit.
On 18 February 2020 at 10:45 am Majella said:
Deborah Russell needs to have a staffer to edit her remarks before sh foes on the record.

How could she actually with a straight face, dare to say "Their objective is to help a customer or a client to structure their finances as best possible, but their advice is being skewed by the presence of a commission"

The bald-faced implication is that getting paid CAUSES me (and you, by extension, of course) to do something 'wrong' in any & all cases. I'm flabbergasted.

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