The Financial Markets Authority (FMA) has expressed concern that insurers are designing incentives that potentially set up advisers to fail in complying with their obligations.
“We have been raising this issue for several years but have seen little response from insurers. This will be a focus of our future interactions and discussions with insurers,” said the FMA in a report released yesterday on conflicted remuneration in the life and health insurance industry.
The regulator points out that Authorised Financial Advisers (AFAs) have a code of conduct that they must comply with. Insurers must, for their part, take responsibility for conflicted conduct that results from incentives offered.
Soft commissions and impact
The report details how nine life and health insurance companies spent NZ$34 million ($23 million) on non-financial incentives like trips, business support and conferences for financial advisers over a two-year period.
During the period, one insurer stopped offering overseas trips. As a result, their sales dropped by a third. This supports what the FMA found in other reviews, that soft commissions directly influence adviser behaviour.
By value, the largest type of soft commission was insurance companies taking advisers on trips. Insurers spent $18 million this type of incentive, 24 of these trips were international, while five were domestic.
FMA says that soft commissions create the risk of conflicted conduct for advisers, as the incentives could influence the way they recommend or provide advice about products to their clients. In a report earlier this year, the FMA detailed how some registered financial advisers were unaware of their need to manage conflicts of interest while providing advice to their clients.
The risk that customers dealing with advisers do not receive complete information about the benefits of a policy are increased when they are not aware of the rewards an adviser is receiving for selling the product.
“We strongly encourage all insurers to consider the nature and value of the soft commissions they provide to advisers to ensure that this method of remuneration supports a focus on good customer outcomes.”
The FMA will show the findings of its review to the Ministry of Business, Innovation and Employment (MBIE) to assist in its review of insurance contracts and conduct. It will be meeting with the insurance providers to ensure they recognise its expectations that they have obligations to manage the conflicts of interest that their incentives are creating.