MR No. 2018 – 18
16 May 2018
A Financial Markets Authority report published today details how nine life and health insurance companies spent $34 million on non-financial incentives like trips, business support and conferences for financial advisers over a two-year period. 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.
Liam Mason, FMA Director of Regulation said, “We are concerned that insurers are designing and offering incentives that potentially set advisers up to fail in complying with their obligations.
All advisers have an obligation to exercise care, diligence and skill, this also means acknowledging and managing conflicts of interest. However, insurers themselves must acknowledge the need to promote good customer outcomes and take responsibility for conflicted conduct that results from these incentives.”
The FMA expects insurers to consider the number and nature of soft commissions they provide to advisers, to ensure risks to customers from conflicted conduct are minimised. Based on the information analysed, advisers seem to be the main beneficiaries of the soft commissions provided by insurers - it is difficult to discern any direct benefit to consumers.
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. The recent FMA report into adviser conduct when replacing insurance policies found a direct connection between incentives like overseas trips and switching policies to reach volume targets.
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 5 were domestic.
Destinations offered in the review period included Tahiti, China, Britain, Argentina, Japan, the United States, Singapore, Fiji, Taupo, Bay of Islands and Queenstown.
The International Monetary Fund noted in its 2017 FSAP report, the prudential risks to the life insurance sector due to the levels of commissions. Today’s report shows insurers spent 9% of their revenue from new product sales in the form of soft commissions. Advisers also receive up front commissions for selling products.
The information contained in the report was obtained under Section 25 of the Financial Markets Authority Act 2011. All information in the report is anonymised.
Sales and advice and the risks of conflicted conduct will be examined in two further reviews by the FMA. One will look at insurance replacement business practices in QFEs (large financial institutions) while another will look at the structure of bank incentives in the sale of financial products.
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