Industry can't fix itself: MJW
Melville Jessup Weaver (MJW) says the fallout from its report into life insurance commissions shows that the industry cannot be left to find its own answer to its problems.
Thursday, March 3rd 2016, 6:00AM 
6 Comments
by Susan Edmunds
The actuarial firm completed a report in November for the Financial Services Council (FSC), which was heavily critical of insurance advisers’ commissions.
It said they were driving poor outcomes for consumers, encouraging churn and boosting premiums.
In the fallout from the report, a number of the FSC’s insurer members quit the organisation. It has since lost its chief executive.
Now, MJW has submitted on the Ministry of Business Innovation and Employment options paper on the Financial Advisers Act review and says the industry needs reform, to remove the conflict of interest created by advisers working on commission.
“Major reforms to the initial commission paid on life policies are critical,” it said.
“We have a poorly functioning market because of the perverse financial incentive in place for advisers. Unless these are tackled head-on, the ability of a new FAA regime to bring about real change is negated.”
It wants commission restricted and life insurance included in the definitions of financial products under the Financial Markets Conduct Act, to give the FMA wider powers to encourage the industry to make changes to how it operates.
“It is clear that the life insurance industry is unable to bring about a solution to the conflict of interest issue on its own. The events after the publication of the MJW Report demonstrated this.”
MJW said much of what the options paper proposed was an important improvement on the current position and that the focus must be on improving customer outcomes.
But it said resolving the commission conflict was paramount. Life insurance commissions should be regulated because the product was socially desirable, a long-term purchase and there were significant effects if the wrong product was bought, it said.
“The key roadblock to achieving ‘public confidence in the professionalism of advisers’ is the conflict of interest that arises when a product provider remunerates an adviser for placing a customer into one of their products, if the structure of that remuneration works against an alignment of interests. That is the situation we have at present in the life insurance sector. If that issue is not satisfactorily resolved all other changes will be negated and therefore ineffectual. We are unconvinced disclosure can adequately deal with this issue,” MJW said.
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Comments from our readers
Are MJW are concerned clients will not get the right provider's product because of commission interests or are they talking about a problem of commission conflicts between different products of the same provider? The two are different issues in my mind. I don't know what the banks do but my understanding is that most (all?) insurers have the same commission levels for their different products(with the exception of Medical insurance, but even then there is typically only one option). If MJW are referring to different commission types within a particular provider, selling the wrong product due to commission interests would be so manifestly inappropriate it would a clear breach of section 33 of the FAA for which there are clear and relatively severe penalties (and something the FMA could address through the QFE approval process?).
If MJW also believe differences between competing provider's commissions creates less than optimal product selection for the client (and we accept MJW's views are accurate and correct) then the obvious solution must surely be to eliminate the commission differences by setting maximum commission levels.
However, if the outcome of commission regulation is a significant reduction in remuneration, there is a real danger advisers who stay in the industry will simply be driven into the arms of insurers as employees. Employees are not paid commission, they are paid a salary and bonus in lieu of commission. Some wold have us believe that is not conflicted, I don't agree, it can be just as conflicted. In fact, employees are only able to sell their employer's product, instantly and automatically delivering exactly the danger MJW are saying is problematic.
Knee jerk reactions based on entrenched beliefs, inaccurate assumptions and incomplete data and the competing self interests of the various players must be avoided as it is likely to work against the delivery of best advice.
All options should be properly and carefully explored, including setting a maximum commission level by law with separate arrangements for replaced business.
MJW's report was widely criticised by many insurance companies, which leads me to conclude that their views may well be open to valid criticism.
It's an embarrassing failure. And Weaver should be both deeply ashamed and censured for it.
Let's remind ourselves of the 4 best quotes:
GoodReturns Monday, November 23rd 2015, 6:38PM
In MJW report on life insurance insurance has been a hot topic of discussion at the SiFA conference. Here are some of the best quotes about it.
"The FSC used to be a round table of providers, now it's a square table with four banks around it," IFA chief executive Fred Dodds.
"My headline would be MJW paid to crusade," SiFA member Murray Weatherston.
"Actuarial alchemy," Retirement Income Group chief executive Ralph Stewart.
"I wouldn't pay for it. It didn't follow the terms of reference," Weatherston.
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