July 18, 2016
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.