Australian advice "failure" raises fears
Australia’s regulator has come out swinging at the country’s risk advice sector’s approach to remuneration – prompting fears its New Zealand counterpart may follow suit.
Friday, October 10th 2014, 6:00AM 
4 Comments
by Susan Edmunds
ASIC has released a report into the risk and life insurance sectors, which said there was an “unacceptable level of failure”. More than a third of advice was being given without complying with laws relating to appropriate advice and putting clients’ needs first, ASIC said.
It found high upfront commissions seemed to correlate with non-compliant advice, particularly in situations where advisers were encouraging their clients to switch products.
"The industry as a whole needs to consider how remuneration and compliance practices can better support good quality outcomes for consumers," said ASIC deputy chairman Peter Kell.
ASIC suggested insurers address “misaligned incentives” in their distribution channels.
Consultant David Whyte, who was managing director AIG Life Australia and executive director of the Ginger Group, said it was important New Zealand’s FMA did not follow in ASIC’s “adversarial” footsteps.
He said it was likely the FMA was keeping an eye on its counterpart's activity. “If the industry regulator in Australia believes that high upfront life product commissions are an issue there, what do you think it would make of the NZ scene?”
New Zealand's commissions are among the highest in the OECD.
He said: “There is an alarming tendency in NZ to mimic the culture, activities, and posture of other regulators, in particular those of ASIC.”
But Whyte said ASIC’s more combative approach had not done anything to protect consumers.
“It should be possible to create the culture within a regulatory environment which presents both remedial and preventative measures. Remedial measures apply after the event, while preventative measures should be a combination of incentive and requirement. At present, there is little incentive to embrace regulatory compliance, only the prospect of punishment in the event of non-compliance.”
Reducing commissions might drive advisers out, he said, not every policy replacement was churn and there were already mechanisms in place to direct advisers not to mislead a client or recommend an unsuitable policy.
“Every successful product and service has some form of distribution cost built into its pricing structure. Life insurance is no different, and any move to change commission structures should be carefully considered against the alternatives.”
He said there would have to be a large change in consumer attitudes to push life companies to change their commission structures.
MBIE has previously said commission levels and soft commissions may be considered as part of the review of the Financial Advisers Act.
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@Pragmatic - I am neither defending nor condemning commission levels - merely making a statement of fact, and certainly not according them a'badge of honour'. But they are what they are, and I'd be cautious about inviting a regulatory body to set adviser earning levels - they may feel that fees should also be subjected to regulatory impost. And apparently not many consumers share your concern that they are 'victims' - at least not if the dispute resolution service provider statistics are accurate.
Despite ASIC's outburst on the issue, their most recent statement acknowledges that risk commissions 'are here to stay'. As to the appropriate level of risk commissions, that's another debate. But I wonder how many advisers would like to see their earnings controlled by a regulatory body?
If you restrict this amount then it will be the consumer that suffers. Less new business will be sold by less advisers with the consumer missing out on good advice.
Less new business sold will result in 'plain vanilla' policies with less benefits for the consumer. This will result in a rise in product costs likely to eat up the 20% saving.
In the past submissions have been made to the FMA showing that Bank staff selling polices to customers stating 'we don't get commission' does not result in customers getting a cheaper premium. One example showed the difference between an adviser sold policy paying 200% commission and a bank sold policy was little more than a dollar per month, approx $56 against a little over $57. What was a killer for the bank client was the fact the bank would not pay a benefit if the person died as "a direct or indirect result of an unlawful or illegal act". Speeding, drink driving etc would fit into that category.
With the amount of under insurance in New Zealand, the last thing we need is someone tampering with the current acquisition model.
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What a sort of assessment of the current situation is this? I think it reflects the old, 'wild west' culture trying to resist the new. Why would anyone need an incentive to comply with regulation? Anyone who charges high fees in a low return environment must be judged as not putting the client's interests first. Exposing them to significant risks without the hope of a reasonable return is about the client taking the risk and the advisor getting the return regardless of all the 'services' some claim to provide for their supposedly transparent disclosure of high fees and commissions.