Financial advisers can earn significant upfront commissions - up to 230% of the first year's premium of a "new" or replacement life policy - and other additional incentives such as qualifying for overseas trips, says the Financial Markets Authority (FMA) in a report published this week into its ongoing review of conflicted conduct and insurance replacement business practices among financial advisers.
The FMA selected 24 advisers for individual reviews, based on the timing of replacement policies being sold and the incentives offered by providers that are the drivers of the poor conduct of advisers.
Of the 24, the regulator issued warnings to four registered financial advisers in relation to providing advice on replacement insurance policies, for breaches of the obligation to exercise care, diligence and skill.
As well as issuing four private warnings, the FMA issued compliance letters to six registered financial advisers and one authorised financial adviser. Inquiries into three authorised financial advisers remain ongoing.
Other findings are:
• Half of the advisers reviewed were either not aware of the obligation, under the Financial Advisers Act 2008, to exercise care, diligence and skill, or they were in breach of that obligation.
• Advisers in this review were poor at keeping records for the benefit of clients.
• Most of those advisers reviewed and interviewed failed to recognise that incentives create a conflict with the interests of their clients.
• The industry – especially insurance providers – must take more care and responsibility for the outcomes and conduct that are driven by their sales incentives.
The distribution model of insurance policies through advisers is the driver for the FMA’s concerns around conflicted conduct in the report. The structure of this business model is based on the payment of commissions and incentives by providers to the advisers who sell their products. The upfront commissions that New Zealand providers are paying are high by international standards.
Mr Liam Mason, FMA Director of Regulation, said: “The failure to exercise care, diligence and skill for their clients was a consistent finding in our review of 24 advisers. Among the 24 advisers who were subjects of this round of inquiries, it was both striking and concerning that many of them did not even recognise that conflicts of interests can arise from incentives and commission.”
While the focus of the FMA's inquiries was the conduct of financial advisers, the regulator has also been reviewing the practices of providers and qualifying financial entities that produce and sell insurance products.”
The probe into the businesses of 24 advisers was part of an investigation begun in 2016 prompted by FMA concerns that huge commissions were resulting in what is known as "churn".