The Financial Markets Authority (FMA) has come out strong against the suggestion that conflicts of interest that lead to poor customer outcomes are driven by financial advisers’ morals rather than commission and incentive structures designed by insurance providers.
FMA chief executive Rob Everett said: “Insurance providers cannot shirk responsibility for the behaviour of adviser that is a direct result of the incentives designed by those same providers. We point to the data and findings in our report as clear evidence that incentives are influencing advisers’ conduct.
“We have been raising these issues since 2015 and we’re disappointed to see signs that the industry continues to disregard the interests of the New Zealand public and consumers,” Everett said.
He pointed out the following findings from the Life insurance replacement business report.
- We consider the industry needs to take more responsibility for aligning incentives with consumer outcomes and managing the conduct and practices that result from their incentives
- The link between incentives and replacement is clear
- Among the advisers we looked at there was no evidence that they were taking their obligation seriously
- Advisers weren’t aware they had conflicts to manage, and in particular registered financial advisers (RFAs) we spoke to didn’t even recognise a conflict of interest when they received an incentive or commission
- This was not a representative sample, but we take no comfort from the findings in the report.
In the report, the FMA issued warnings to four registered financial advisers (RFAs) for breaches of care, diligence and skill under the Financial Advisers Act (FAA), the FMA also stated that conflicts of interests can be driven by commission and incentives programmes run by life insurers such as Partners Life.
But Partner Life chief executive Naomi Ballantyne said: “As virtually all RFAs and Authorised Financial Advisers (AFAs) receive commissions and can qualify for incentives for the sale of risk protection products following their advice process, and only a small number have been identified as having poor practices in respect of replacement business, it’s clear to Partners Life that commissions and incentives are not the cause of poor practices, rather individual morals are.
“This is certainly in keeping with our experience of adviser behaviour, that the vast majority take their moral obligations to their clients very seriously irrespective of any regulatory obligations,” she said.
Ballantyne said the industry needs to take a stronger stance on holding advisers and, or employees, to character and behavioural standards, “which reflect our commitment to putting the clients’ interests first”, Ballantyne said.
“As the FMA have up to this point only focussed on advisers who are remunerated by commissions, it will be essential to investigate the advice practices of distribution channels which are not remunerated by commissions, for example Qualifying Financial Entities (QFEs) and bank employees, over the same period of time before it will be possible to determine if there is any comparative differences in the quantum and nature of poor advice practices across differing remuneration structures.
“By drawing a conclusion that it is commissions and incentives rather than individual morals that drives poor behaviours, while still only part of the way through their research, and given such a small number of advisers having been identified as behaving poorly, the FMA risks generating consumer distrust of the adviser distribution channel and may consequently drive those consumers to other distribution channels, which have not yet been investigated in the same way, or alternatively to simply not engage in any advice process at all – something that would be totally counterproductive to the best interests of consumers,” Ballantyne added.
Partners Life said it’s in “total agreement” with the FMA regarding the damage poor replacement advice can cause to customers. “We also agree the industry alongside the regulator must find the best methods to eliminate the opportunity for poor advice practices and behaviours to impact negatively on consumers.
“Partners Life agrees with the FMA that our goal should be zero, and we intend to continue to work closely with MBIE and the FMA to find the best solution(s) to reach this goal across all distribution channels.” Ballantyne said.
“In practical terms this means being prepared to decline or terminate an agency, or an employment agreement, if evidence of poor morals is identified, and then to address and put right any negative impacts on the applicable clients,” Ballantyne added.
Partners Life will be taking an undisclosed number of qualifying advisers and their partners to Hawaii this year. The insurer declined to confirm how much the offshore incentive is costing stating it does not disclose the commercial arrangements it makes with advisers.