Risk Commissions in NZ to Stay

The New Zealand Government has recommended that life insurance commissions should be retained at their current levels because it says banning commissions is not a ‘silver bullet’ that will improve the quality of advice.

The Government’s Ministry of Business, Innovation & Employment (MBIE) detailed four critical factors that led to its decision to recommend retaining life insurance commissions as a remuneration option for advisers:

There is a risk that banning commissions in New Zealand would further limit access to advice
  • Commissions are not themselves harmful. They are a means of funding the distribution cost of the adviser channel. There is a risk that banning commissions in New Zealand would further limit access to advice.
  • A ban on commissions would not directly target poor conduct, as the FMA [NZ regulator, the Financial Markets Authority] noted in its recent review of insurance replacement business many advisers do not have high replacement business despite being paid on commission structure (see: NZ Regulator Claims Churn a Minor Problem).
  • It would not address conflicts of interest where financial products are sold through in-house distribution channels, such as bonuses or sales targets.
  • The proposals represent a more prudent approach in the first instance. However, MBIE and [NZ regulator] the FMA will continue to monitor the conduct of advisers to ensure the measures are sufficient.

This recommendation, released last week as part of the NZ Government’s response to a comprehensive review of laws governing the conduct of the nation’s financial services sector, was one of a number of key recommendations for changes to the country’s Financial Advisers Act 2008 and Financial Service Providers (Registration and Dispute Resolution) Act 2008 that also included:

  • Simplifying the regime by removing unnecessary complexity and regulatory boundaries
  • Establishing an even playing field with more proportionate regulatory requirements
  • Replacing current adviser designations
  • Improving consumer understanding through disclosure and client-care
  • Enabling lower cost fit for purpose licensing

A fact sheet outlining the rationale for these recommendations noted how the NZ Government believes these and other changes will make it easier for advisers to provide good quality financial advice:

  • Enabling innovation – advisers will be able to provide robo-advice and a modernised financial advice market  could develop here as is happening in other countries
  • Enabling more sensible advice conversations – by removing the distinctions between ‘class’ and ‘personalised’ advice, and ‘Category 1’ (complex) and ‘Category 2’ (simple) products, advisers won’t be restricted from providing consumers with the advice they want and need when they have the competence to provide it.
  • Reducing compliance – by simplifying disclosure requirements and streamlining licensing and reporting requirements, some compliance activities that are currently burdening advisers will be minimised.
  • Providing greater flexibility and choice – financial advice firms will be able to provide advice through financial advisers, agents and/or platforms. Financial advice firms will be given flexibility in how they will be required to demonstrate compliance with the relevant competence, knowledge and skill standards and the licensing and reporting requirements are proportionate.

In its Final Report, the MBIE expanded on its reasons for retaining risk commissions, particularly in response to calls made in some quarters for the banning of risk commissions due to inherent conflicts of interest that attach to this form of remuneration:

There is a clear trend internationally toward more direct interventions, including bans on  commissions. This comes in the wake of the global financial crisis (GFC) and several major mis-selling  scandals (e.g. widespread mis-selling of income protection insurance in the United Kingdom), and as  behavioural economics increasingly points to the limitations of disclosure by itself to address conflicts of interest.

…our recommendations represent a more prudent approach

Given the significant risk of harming access to advice, our recommendations represent a more prudent approach in the first instance. However, we suggest that MBIE officials and the FMA closely monitor conduct and the impact of the recommendations taken forward to ensure they are sufficient.

The FMA have also indicated in their report on life insurance replacement business that they will monitor advisers, and carry out site visits where particular issues have been identified. In particular, they will be visiting advisers with high rates of replacement businesses to review their practices and examine whether churn is occurring.

The vast majority of industry submitters on the Issues Paper thought that commissions should not be banned or restricted. They are widely viewed as a legitimate form of remuneration, and submitters raised concerns that such intervention could adversely impact the accessibility of advice. Many submitters were concerned that a ban on conflicted remuneration would create an advice gap for consumers who are unwilling to pay upfront for advice. This concern is supported by an evaluation of the ban of commissions that was implemented by the Financial Conduct Authority (FCA) in the United Kingdom.

  • Simon Milton

    Well done NZ! Great to see some common sense still left in the world!

  • chris

    congratulations New Zealand you have shown what common sense and an understanding of how commissions do work in the industry.
    Just maybe some of the so called experts in Australia will take notice as they have no idea what they are doing.

  • Paul F

    Another things the Kiwis are beating us at – common sense. The LIF framework has no benefits for consumers, only the FSC and its members – wake up Kelly O’Dwyer -you are being played

  • Peter Mackay

    We have been shown up by the Kiwis again but this time in common sense & looking at solutions to the problem not vested interests. May this influence our regulators.

  • Roger Smith

    It’s interesting that the comments from the MBIE are a mirror image of those expressed by advisers on this and similar forums. It would be nice to see the type of support here from groups purporting to represent advisers as that which obviously exists from adviser groups in NZ.

  • me

    I have limited knowledge of NZ life insurance, but it looks like the comm is 180-200% + 7.5-10% ongoing. That is staggering.

  • Dave R

    Hmmmm “banning commissions is not a silver bullet” has anyone let the Australian regulators in on the secret?

  • Jeremy Wright

    Once again, the KIWI’s have hit it on the head.

    Why is it that the N.Z Government can come up with a clear, concise investigation, summarise with 4 clear points and find an obvious solution, which is to monitor and carry out site visits on advisers where issues have been identified, such as high replacement of Insurances, to see if churn is occurring.

    How many investigations have our Governments of the day and regulators done and how many millions of dollars of Taxpayers money wasted and massive disruption to
    advisers practices been pushed upon us, for what result?

    We are still in limbo with ridiculous and effectively unlawful proposals to place restrictions on Independent adviser businesses and regulations to reduce their
    Business Income, while allowing the Banks to avoid most of the regulatory regime, with blatant lobbying and attempts by the FSC to push their own agenda’s, like allowing direct life insurance product floggers to be exempt from most of the LIF regulation and to have NIL regulation to make Big Life Insurance Companies improve their game.

    I am sure the LICG will take note of the N.Z experience and push for a similar result in Australia, which is the obvious answer.

    What will the AFA and FPA do?

    • emkay

      I am pretty sure the AFA and FPA will continue to do what their FSC paymasters tell them to do.

  • Robert Coyte

    “Given the significant risk of harming access to advice, our recommendations represent a more prudent approach in the first instance.”

    Kiwis showing the Aussies up yet again amazing what happens when you don’t have vested interest groups dictating policy to politicians.

  • WB

    To the AFA, FPA and for that matter, the FSC. How many times have you been asked in past RiskInfo editions, to answer the question as to how the current LIF can benefit consumers? Yet you never, NEVER, respond! Why?
    And now we see our friends across the Tasman using what we can all see is a “common sense” approach to retail life insurance.
    AFA, FPA and the FSC – I challenge you to respond in RiskInfo. If you do not agree with NZ in any way, have the courage to state why! If you cannot fault what NZ has done, then why are you giving in to the nonsense that has been passed on to our own government?
    We are all waiting for your response….

  • Paul Underwood

    There is an obvious reason why Sally Loane and the FSC have not responded to calls for how LIF will benefit consumers and that is because there are NO benefits to consumers.

    The only benefits are to insurance company profits which is what this whole farce has been about from day one. It is a disgrace.

  • Craig Yates

    The assessment and the subsequent decision from the New Zealand Government and the the ASIC equivalent, Financial Markets Authority, sets a precedent that is now simply impossible for Kelly O’Dwyer to ignore as it is based on a comprehensive analysis whilst still maintaining a very strong focus on the quality of advice and consumer best interest.
    In addition, the FMA has found that advisers that are remunerated on a commission basis do not have a high incidence of replacement business and that commission in isolation does not have a direct correlation to high policy churn rates.
    This is even more interesting when considering the findings from the ASIC Report 413
    Pages 36,37 & 38 of this report make for interesting analysis.
    Figure 15 on page 36 is titled: “Lapse rates by remuneration arrangement for stepped premium policies.”
    This graph illustrates that the lapse rate in the first year for policies where the adviser was paid on an Upfront commission basis was only 7%.The lapse rate for the Hybrid remuneration model in the first year was in 5%……….and the lapse rate in the first year for policies where the adviser was paid on a Level commission basis was in fact above 8%.!!
    Even more interesting is that this same graph shows that the LEVEL commission policies continue to have a HIGHER lapse rate than the Hybrid commission policies for the first 3 years of the policy!
    In fact this same graph illustrates that from year 4 to 5 of the policies existence the difference between the lapse rate of Level commission policies is at 12%, whilst the lapse rate for both Hybrid and Upfront commission based policies is about 13.5%.
    So the FSC have stated in their submissions and continue to argue for the implementation of either Level commission model only or a nil commission model only when the difference in the lapse rates between Upfront, Hybrid and Level commission remunerated Stepped premium policies is only 1.5% after the policies have been in force for 4-5 years!
    So,if the scrutiny of Life Insurance policy lapse rates is incorrectly manipulated as “policy churn”, then continually advocating for remuneration models that are less than the existing Hybrid model or at a Level model is not supported by appropriate data and as identified, does not result in any identifiable or meaningful difference over a 4-5 year period.
    The ASIC Report 413 also found that when any other commission remuneration model other than Upfront was utilised, the advice success rate was 93%.There was no evidence that reducing commissions to a level lower than the existing Hybrid model increased the advice quality success rate to more than the 93%.
    It is now time the FSC Life Board Committee made comment rather than Sally Loane. Continually producing empty rhetoric about enhanced consumer benefits of the proposed LIF without producing any evidence or data that supports this is irresponsible and is further illustrating the conflicted nature of the agenda.

    • paulkate72

      Much research there, Craig. You’re certainly doing what you can to add some commonsense to this whole discussion. Still, just as natural justice has gone down the drain your wise words will likely go down the same direction.

  • Mark B

    A triumph of commonsense & professionalism over greed & amateurism. This report and the NZ govt response reflect very poorly on their Aust counterparts.
    I suggest the report and commentary need to be rushed into the hands of the politicians (individuals and the senate committee) & media (Fairfax) with a demand to explain the differences in approach and outcome.

  • Katrina Wiltshire

    The NZ Government have common sense, well done. When will our Australian Government & FSC do the same? Maybe when they stop getting paid by the Life Insurance Companies to stamp out the Independent Adviser, who seems to be the only one working for the common man in implementing Life Insurances & sound Financial Planning Advice for client’s good. Telesales Life Insurances in Australia are more expensive than what we as Independent Financial Advisers & Risk Specialists provide to clients – given that clients are either accepted/loaded/excldued or declined UPFRONT by the Life Insurer, therefore no dilly dallying at Claim time. Peace of mind for clients from Independent Advisers. The Australian Government & the FSC need to take off their rose coloured glasses & see that if they proceed in total with the recommendations on the table, more Australians will be underinsured or have no insurance what-so-ever. Whilst the Insurance Companies & Banks will have the entire market share with massive profits that have never been seen before in our life time. Unbelievable in our so called modern times & all for clients best interests.