FMA has eye on commissions
Practices that encourage churn or switching, RFA and AFA conduct and remuneration arrangements, including commissions, are risks to financial services providers’ conduct that the FMA wants to tackle, its chief executive says.
Friday, October 31st 2014, 6:00AM 
4 Comments
by Susan Edmunds
Rob Everett spoke to the Infinz AGM in Auckland yesterday, at which he said the regulator would be setting high expectations of conduct for the industry.
He said conduct regulation in financial services was new to New Zealand, but that there was a steadily increasing focus on quality conduct, to build consumer trust, as a result of the Financial Markets Conduct Act.
Everett said the FMA had identified priority areas to tackle, where there was the potential for low-quality conduct and lesser-quality outcomes.
They included variable quality of advice to consumers and investors, including among QFEs, AFAs sand RFAs, constraints on access to advice for consumers and investors, including when making KiwiSaver decisions, and shortcomings in investors’ understanding of products.
“Areas you should anticipate us focussing on – under this priority – are practices that encourage churn or switching, including in KiwiSaver and insurance… RFA and AFA conduct… and remuneration arrangements including commissions,” Everett said.
The FMA could also see risks in distribution models that exacerbated conflicts, incentives to mis-sell or churn products including conflicted remuneration arrangements, and poor quality disclosure about fee sand risks. Everett said: “Areas you should anticipate us focussing on – under this priority – are distribution models that lead to conflicted advice and that could also lead to mis-selling. Fee-driven conduct that leads to lesser-quality outcomes for investors. And ensuring systems that provide the proper custody of assets.”
Everett said conduct and consumer confidence should be seen as one and the same by those operating in the financial markets.
"Conduct and confidence are a two-way contingency. You can’t get one without the other. That’s the opportunity we are presented with in New Zealand as we enter 2015. Financial services and capital markets where we can rely on quality conduct, in order to provide confidence for all of us.“
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Comments from our readers
Wholesale accusations of churning are unhelpful, ill-informed, and inaccurate.
Nobody condones or endorses an adviser changing products for personal gain at the expenses of the client's best interest - I think we all get that.
But there are other more complex issues at play as touched on in the first comment above.
Question - How does the regulator propose to respond to a product provider who takes a commercial decision to allocate resources to systems management and leave product development for another day, if, by doing so, the product range becomes out of step with the market and uncompetitive? Why wouldn't an adviser recommend replacement in these circumstances?
Question - How does the regulator propose to respond to a product provider which develops advanced technology that reduces operating expenses substantially, and decides to apply those savings to attract more new business by enhancing adviser compensation? Why should a product provider be constrained or vilified for being more efficient than its competition, and rewarding advisers for recommending better products?
With respect, the opportunity goes beyond quality conduct into the area of developing a collaborative approach to improving the industry for the consumers' benefit.
As far as I can see, Australia and the U.K. in their 'us and them' approach have singularly failed to deliver anything other than burgeoning bureaucracies and budgets, with little or no visible consumer advantage.
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How about we all remember that we have a best interest duty to our clients to recommend the most appropriate solution for their needs. If product providers fall behind the market in price, quality of benefits, quality of service standards, credit ratings or a myriad of other considerations we would be in conflict with our best interest duty to not consider alternatives.
It's also worth remembering that remuneration models were created by insurers who were only too happy to reward production of business new to them with scant regard as to where it came from.
I do not support replacement business which is not in the clients best interests, nor do I support global accusations made by industry bodies, insurers and regulators,against decent hardworking advisers who are on the whole doing the right thing by their clients.