Commission regulation 'not the answer to churn'
There are claims that changing commission models will not address concerns about churn on either side of the Tasman.
Tuesday, December 9th 2014, 6:00AM 
2 Comments
by Susan Edmunds
Australia’s Financial System Inquiry final report has questioned whether commission-based arrangements are suitable for the sale of life insurance products or the activities of stockbrokers.
The report creates scope for efforts to address problems within the risk industry to be given time to work but says if there is no progress, the Australian Government should revisit a ban on commissions.
PAA president Bruce Cortesi said no one would argue there was concern about churn of insurance in Australia or New Zealand. “But changing the commission model will not stop that happening.”
He said the discussion should start with product providers. “They don’t have to accept business that is replacement business from another company.”
He suggested that if there were valid reasons for replacing a product with another, commission could stay as it is. But if there was no valid reason for switching, there might be no upfront commission paid but a reduced fee and renewal commissions.
Cortesi said commission was necessary because life insurance was a product that had to be sold rather than purchased. “I don’t see a line of people waiting outside my door to purchase life insurance. If that was the case, they could review it.”
There was also a need for a public awareness campaign to educate consumers about the value of advice, he said.
Michael Dowling, president of the IFA, said he was not surprised at the report, given the instances of poor performance that had been revealed in Australia.
New Zealand had a different structure that was more successful at regulating the industry, he said, with bodies such as the Code Committee ensuring the Financial Advisers Act was deployed appropriately.
The Australian report said industry attempts to self-regulate had not been successful. But Cortesi said New Zealand had a better chance of achieving that. “We can learn from Australia and here, professional associations generally have a good relationship with the FMA.”
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What is being suggested by the FSI is a rule that upfronts cannot be more than trails. This is a rebalanceing of commissions - reduce upfronts, increase trials - so overall commission is not changed, but incentives are moved towards servicing clients rather than new sales.
Michael Dowling is on shaky ground with his claim that the FMA has not regulated insurance commissions merely because 'NZ is better'. My impression is that the FMA has simply not had the time to focus on insurance so far.
Both the IFA & PAA are kidding themselves if they think that NZ insurance commissions will not be regulated. They will be, especially since NZ upfronts are double Australia's. The question is how - so the industry associations need to create well-considered, evidence-based, proposals for optimal commission regulation, and get the FMA to support to that. It would be bad if, due to their unwillingness to engage, commissions are banned entirely.