Insurers call for clarity on commissions ban

Facing its biggest shake-up in decades, the $2.57 billion life insurance sector is seeking urgent clarification around the government’s threat to ban sales incentives such as commissions.

Typically, insurers pay commissions to intermediaries – usually financial advisers, banks and other insurance companies – who sell their products to members of the public.

But after a damning report on the insurance industry released by the Financial Markets Authority (FMA) and the Reserve Bank (RBNZ) last week, Commerce and Consumer Affairs Minister Kris Faafoi and Finance Minister Grant Robertson said the government would “get rid of sales incentives in the insurance industry that are driving behaviour that is not in the best interests of consumers”.

A consultation paper will be released in May and legislation will follow later this year. Trouble is, neither minister was specific about exactly what commissions would be targeted, apart from noting that incentives such as overseas trips and loaded upfront commissions “could create conflict for the salesperson”.

Both ministers have been silent on the other type of incentive common in the industry – “trail” commissions, which are paid to advisers and other intermediaries over the life of an insurance policy.

Across the Tasman, these commissions have come under fire from the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (ARC). After more than a year of hearings, Commissioner Kenneth Hayne released his final report last week, and both insurance and mortgage broking commissions were in his firing line.

Key industry players are seeking urgent meetings with ministers Faafoi and Robertson which, they say, will help them respond to the regulators’ concerns.

In the meantime, financial advisers have been quick to react to the report and the ministers’ proposed ban. Some believe it could decimate the industry, especially as more than 80% of New Zealand’s life insurers are foreign-owned.

“These insurers will pull out of New Zealand if the government makes it too hard for them to do business here,” said one adviser, whom LawNews has agreed not to name.

“I agree that in many areas the industry needs to clean up its act but how are you going to sell insurance products – or any product for that matter – unless you incentivise the salespeople? It just won’t happen.”

Industry players are also critical that the conduct and culture of New Zealand’s biggest insurer, the government-owned ACC, was not part of the regulators’ investigation.

Sixteen insurers were in the regulators’ sights, and the FMA and RBNZ have left the sector in no doubt as to where they stand on the ways insurers and intermediaries incentivise their sales staff.

“Different rates of commission are paid for different products – sometimes different products offered by the same insurer – increasing the risk that intermediaries act in their own best interests, rather than those of the customer,” they say in their report Life Insurer Conduct and Culture.

“Large upfront commissions at the time of sale can commonly range from approximately 170% to 210% of first-year annual premiums.”

The report cites a survey of 29 financial advisers conducted as part of the review where most said they preferred product providers (insurers) to offer remuneration by way of incentives based on sales.

For 27 of the 29 advisers, their preferred provider offered overseas trips – one of the so-called “soft commissions” coming in for heavy criticism from the regulators. According to the industry, these commissions have now been phased out; the FMA and RBNZ acknowledge this but say there was little action until their investigations began midway through last year.

The review also references a 2018 FMA report which found that life insurers were designing incentives that potentially put advisers in the position of failing to comply with their obligations under the Financial Advisers Act 2008 to treat customers with care, diligence and skill.

These obligations will be strengthened in new legislation now before Parliament, the Financial Services Legislation Amendment Bill. If passed in its current form, this will require advisers to prioritise client interests.

“We consider many current soft commissions will be unjustifiable in light of this requirement,” the FMA and RBNZ say.

“We have yet to see any insurer confirm and announce an intention to change the qualifying criteria for soft commissions so intermediaries are incentivised to improve customer outcomes rather than merely to sell products. We think this change needs to occur.”

The regulators acknowledge some insurers have very good policies and practices for regular, ongoing client contact but others, they say, are doing nothing.

They have put the onus squarely on the industry to redesign its remuneration and incentives policies and structures to achieve what the regulators believe should be the industry’s main objective: sustainably good customer outcomes.

“Removing any incentives linked to sales measures is a significant step towards this goal.”

But it may not be sufficient. “We expect more proactive oversight by boards and senior management of risks associated with incentives,” the regulators say.

The deadline for action is tight: the FMA and RBNZ have given each insurer until 30 June this year to devise an action plan to address their concerns, and to report progress. Insurers must explain how they will meet the regulators’ expectations around commissions for intermediaries and staff incentives and – probably the most onerous task of all – to do a detailed gap analysis against last week’s findings of the ARC as they relate to insurance.

Finally, by 30 June the regulators have asked for a systemic review, going back at least five years, of each insurer’s life products and policy-holder portfolios “in order to proactively identify any conduct and culture risks and issues”.

If they are not satisfied, “further action” has been promised. And any conduct issues resulting in poor customer outcomes, warranting further action and potential enforcement action, will be followed up by the FMA, RBNZ or the Commerce Commission.

“Any life insurer that does not, by 30 June 2019, commit to removing incentives linked to sales measures will be required to explain how they will strengthen their controls sufficiently to address the risks of poor conduct that arise with such incentives,” they say.

“We would like to see advisers incentivised for providing ongoing service and advice to customers about product suitability, and for maintaining good customer outcomes.”

The changes themselves must be implemented by the first performance year beginning after 31 December 2019.

Many in the industry, of course, say they do this already and some advisers are “prepared to bend over backwards” for their clients. They estimate the “cowboys” make up only about 5% of the industry and “we all know who they are”.

Many experienced advisers say they no longer focus on upfront commissions, preferring trail commissions instead. But industry newcomers, especially younger advisers who are still building their client portfolios, rely heavily on upfront payments for their first few years.

Life insurers, banks and financial advisers now have a big job ahead of them, says Richard Klipin, CEO of the Financial Services Council.

Right now, there is “a fair amount of complexity and a fair lack of clarity” around the government’s intentions though the industry accepts there are improvements to be made in a range of areas outlined by the report.

“Conduct, culture and ensuring great customer outcomes is paramount,” Mr Klipin says. “We also accept that action in some areas was not taken as quickly as desired and that has been the source of frustration for the FMA and RBNZ.”

The industry will respond within the regulators’ timeframe, he says.

“The financial services sector plays an important role in the prosperity of New Zealand and we are an industry that is entrusted to grow, manage and protect the wealth of Kiwis. As such, we welcome and expect scrutiny and are committed to serving New Zealanders in a fair and transparent way.”

Katrina Shanks, CEO of Financial Advice New Zealand, is another key industry player seeking clarity from ministers Faafoi and Robertson.

She assumes they are talking about soft and upfront commissions – the two singled out by the FMA and RBNZ for specific criticism – but it is not clear what their proposed ban is intended to cover.

“The last thing the regulators want is to dismantle the insurance advice community,” she says. “I don’t think we need to push the panic button and I don’t think the report shows a systemic failure for financial advisers.

“What we do know is that we need a sustainable business model to allow financial advisers to provide financial advice to all New Zealanders. What does this model look like? We don’t know until we look at all the options available and compare them to those in other jurisdictions. We have to make sure it’s a remuneration model that’s fit for purpose for the environment we’re working in today and meets the needs of consumers.”

Central to the FMA and RBNZ’s review were the “extensive weaknesses” it found in the life insurance sector in both conduct and culture.

Governance and management of conduct risk are weak, they said, and there is a lack of focus on good customer outcomes.

Insurers needed to act urgently and make major changes to address those weakness as they left the industry vulnerable to misconduct (breaches of the law) and escalation issues.

And there is a regulatory gap.

Neither the FMA nor RBNZ has an explicit or legislative mandate to regulate life insurance industry conduct, “though standards are implicit and important to the statutory purpose of both regulators”, their report said.

Specifically, they said there were weaknesses in insurers’ processes for identifying risk, and remediation of conduct issues was “generally poor”.

When it came to risk, the regulators said they were not confident that insurers were aware of all the current issues in their businesses.

“There is an acute lack of effort or processes across the industry to identify, monitor and manage issues needing remediation.”

The industry was too complacent about conduct risk and insufficiently focused on developing a culture that balanced shareholders’ interests with those of its customers.

In fact, some insurers saw financial advisers and banks – the intermediaries – as their customer, rather than their policyholders. And insurers generally didn’t see the conduct of the intermediaries as being their problem.

This must change, the regulators say.

Insurers and their boards carry the ultimate responsibility for conduct and risk in the industry.

There is a long way to go. Currently, “there is a serious lack of insurer oversight and responsibility for sales and advice, and customer outcomes”, and reporting on conduct risk was often ad hoc and reactive.

Across the ditch, Commissioner Hayne said the current caps on Australian life insurance commissions should be “ultimately reduced to zero”.

Along with his recommendation that all commissions be scrapped, Hayne has pushed for an increase in the duties that insurers owe to their customers. But the life insurance industry has had a reprieve: any changes to commissions will depend on the outcome of a review the Australian Securities and Investment Commission (ASIC) is doing in 2021.

But the Australian mortgage broking industry is bracing for big changes. New trail commissions, described by Mr Hayne as “money for nothing”, will be banned from July 2020; upfront commission will be subject to a three-year government review. 

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