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Commission creep concerns FMA

The Financial Markets Authority is warning product providers that it does not like what it is seeing with commissions.

Tuesday, February 1st 2022, 8:26AM 12 Comments

The regulator says after its review of banks and life insurers, in partnership with the Reserve Bank, it has seen mixed results.

"Sales-based incentives for staff have generally been replaced with incentives that focus more on good outcomes for customers.

"However, we still have concerns about commissions paid to intermediaries, and have seen commission levels increasing, after they were lowered following our initial reviews."

The FMA plans to expand its coverage of the financial advice sector.

In a statement it says: "We have been transparent about our intention to build internal capability to support the new financial adviser licensing regime."

"A dedicated financial advice team was established in 2020 and now has 17 staff, with plans to recruit three further people by the first quarter of 2022. This compares to nine staff in January 2021."

The team is led by Michael Hewes (Head of Financial Advice), reporting to James Greig (Director of Supervision).

The regulator's new chief executive, Samantha Barrass, started last week. Her official welcome powhiri is today (February 1).

Meanwhile, the FMA is gearing up for the new conduct regulations which are working its way through Parliament.

It says that administering the new regime will require significantly expanded resources.

"In preparation, we have conducted an internal review of our readiness for the CoFI legislation (as well as other additions to our remit), including looking at our regulatory model, core processes, resourcing levels and expertise."

"A programme of work is underway to drive the enhancements and developments that will ensure the FMA remains fit for purpose in the light of an expanded remit."


Tags: FMA

« Inside the FMAOECD says New Zealand does well but difficulties remain »

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Comments from our readers

On 1 February 2022 at 6:47 pm JPHale said:
I'm not surprised but also wondering about the motivation here when Sue Chetwin’s (FMA Board) old organisation Consumer publishes a report with scathing conclusions about commission without any merit or qualitative connection to their subject matter.

Sounds like the usual which hunt now driven by another organisation.

Have commissions creeped, yup, has the cost of doing business increased? Yup. Has it meant adviser are substantially better off? Nope.

All that has changed is a bunch of free stuff previously provided via overrides is now visible and having to be paid for. Game net zero, though probably -ve once all counted and running for 2023.

Have some banked it rather than investing in their businesses, probably, but it will be short lived once the full cost of operating comes to bare.

The questions that will follow any change in commissions, if it's changed, will alternative approaches of supplied offices and subsidised rents etc come under the same scrutiny?

Also stuff I have written about over the last few years here...
On 2 February 2022 at 7:54 am Backstage said:
I agree JP and I would like to know exactly what the concern is with evidence supporting any concern. Like many of my colleagues who have been in the industry for years, if I was to ask them what percentage (specifically) they obtain from any supplier they would struggle give an exact answer. We consider it is all about the same. I would have to look it up. I do fear that some folk at the FMA have huge assumptions that Financial Advisers would compromise quality product and outcomes for commission.
On 2 February 2022 at 8:54 am Bikedude said:
Well said JP. Interesting that people on huge salaries like to point the finger at people and organisations who they think are on big commissions, without even looking at the costs. This is not profit FMA, this is our pre cost income. We are not better off, largely because of the additional time and cost that you impose upon us without an actual proven improvement in customer outcomes. Talk about situating the outcome before the investigation. An open mind would be nice.
On 2 February 2022 at 3:41 pm Dirty Harry said:
Creepy Commission Comments Concern Advisers

Financial Advisers are warning regulators that we do not like what we are seeing with commissions comments.

The regulator says after its review of banks and life insurers, in partnership with the Reserve Bank, it has seen “mixed results”.

"Sales-based incentives for staff have generally been replaced with incentives that focus more on good outcomes for customers”.
That’s good, right? And yet, after the removal of sales-based incentives, a move to incentives that focus on good outcomes, and despite there being no empirical evidence that shows current remuneration settings are causing poor outcomes, regulators continue to hold a myopic focus on commissions.

"However, we still have concerns about commissions paid to intermediaries, and have seen commission levels increasing, after they were lowered following our initial reviews." Advisers are demanding to know what these “concerns” are, and what they are based on.

Clearly the concerns are not based on FADC cases - only handful of people have gone there.
They cannot be based on complaints - none of the DRS providers are rushed off their feet. Complaints numbers are consistently low.
Are they based on examples of client harm caused by behaviours that would have been displayed regardless the method or rate of remuneration?
Are they based on a living example of the broken clock method? – where if one stares at a clock long enough eventually one will correctly read the time.

After seeing the cost of FMA levies substantially increase, new fees and levies imposed, the cost of PI insurance triple, while managing the workload and costs involved with preparing for licencing concurrent with the general cost of being in business increasing overall, advisers have welcomed the relative stability of the current remuneration model.

While any recent increase in commission is actually a targeted payment (see good outcome above) that brings transparency to payments and/or services many were already receiving via overrides, in the main all it does is goes some way to offsetting advisers’ increased costs. Meanwhile the FMA is "gearing up" and "will require significantly expanded resources"... they are saying, straight-faced, that due to their increased costs their funding requirement must increase.
On 3 February 2022 at 9:30 am w k said:
@dirty harry: i can only conclude that there's zilch respect for advisers who are treated like dirt and back-stabbed.

for some reason, some people seems to hate advisers. on the one hand, politicians are talking about minimum and living wage for employees, and on the hand, cut advisers' remuneration in spite of the drastic increased operational costs. then come money week, expect advisers to provide free service.

the regulations may be sum up like this - if someone were to ask you for the time, by law, you are have to explain how the clock works first.

and your last para, exactly my thoughts. advisers, expect further increase in fees after march 2023. my bet, lesser advisers will be funding an even larger fma.
On 3 February 2022 at 9:50 am Matron said:
The FMA is still playing the same old broken record with little published empiracle evidence to back up their assertions.

It would be interesting (for the FMA) to first determine from the DRS providers the number of customer complaints they have received regarding Adviser commissions.

Realistically the majority of Kiwis are never going to pay a fee for financial advice. If Advisers cannot expect to be well paid it's little wonder that the barriers to entry will become too hard for potential new Advisers.

The rub of the matter is that the FMA's Head of Financial Advice, as poacher turned gamekeeper, should be well aware of this paradigm and is in a position to educate their new CEO accordingly.
On 3 February 2022 at 10:57 am Skeptical said:
Funny, I don’t recall a reduction in commission ever resulting in providers charging a lower premium. If the FMA are well and truly there to promote good customer outcomes, you’d think they’d be focusing on customers rather than the commission rates. Look I get if, they think that creeping from 190% to 220% is going to create bad behaviours - but I’d think it’s probably best to focus on those bad behaviours rather than the commissions themselves. Creeping up by 30% really isn’t making it that much different.

Here’s an example, they praise the banks for removing sales incentives for staff, bonuses etc. however, one of the major banks have changed the names of their branches to ‘advice centres’. A reasonable client entering an ‘advice centre’ would rationally assume they’re receiving advice about financial services products. However it appears their branch staff aren’t all level 5 qualified financial advisers. In this case, removing the incentive may have caused a drop in banker’s pay, but the customer outcome hasn’t improved, if anything has decreased.
On 4 February 2022 at 6:56 am Tony Vidler said:
I have no issue with our market regulator having and expressing an opinion, but I do question the weight placed upon it by industry and media.

Isn't the authority whose primary concern with "pricing" actually the Commerce Commission?

Am I incorrect in thinking that the FMA's remit is industry behaviour and standards, and market efficiency?

The only possible argument I can see for the FMA weighing in on pricing issues would be if they had a substantive reason to believe that consumers were being misled or disadvantaged, or that an inefficient market was being created through pricing issues.

Even if there were some evidence to suggest this was the case in NZ personal risk lines (which I can't recall seeing), wouldn't it require an assessment of all the pricing components - supplier operational costs, regulatory levies and imposts, mortality/risk pricing and experience, together with the cost of distribution?

I really do question whose agenda is being pursued with this frequent raising of distribution costs.
On 4 February 2022 at 12:53 pm Questions said:
As Tony said, and I echo, there is an agenda being pushed here. But who's?

I also believe that insurance provider's internal metric of persistency should be replaced. Persistency is literally a sales based measurement.

Issue a new policy with provider X = persistency is positively affected.

Cancel an in-force policy with provider X = persistency is negatively affected.

If my client's needs have changed and a reduction of cover is required with their existing provider, why is the adviser negatively affected for correct servicing?

The same goes if the client is having affordability issues (as an example) and the best option is to change provider. Why is the adviser penalised?

Any thoughts on this?
On 4 February 2022 at 2:15 pm Murray Weatherston said:
Jeez Tony
Are you trying out for an appointment by, or a job with FMA?
On 4 February 2022 at 3:36 pm Dirty Harry said:
as if we don't all know whose agenda it is!
someone with a history such pursuits and hatchet job articles.
On 8 February 2022 at 4:40 pm Tony Vidler said:
@Murray Weatherston:

not a hope in hell my friend.
...and I don't imagine I'll every apply for, or be given, a job at any financial institution either.

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