'Inappropriate' incentives contentious
Product providers and industry commentators are at odds over a new proposed duty not to offer inappropriate payments or incentives to their representatives.
Wednesday, June 7th 2017, 6:00AM 
11 Comments
by Susan Edmunds
While financial advisers would be required under the new rule to meet uniform disclosure requirements, financial advice representatives will work under a framework set out by the providers they work for.
The Financial Services Legislation Amendment Bill providers must not give any representatives an inappropriate payment or other incentive. That will cover things such as commissions, sales targets, bonuses and soft commissions.
In its submission, Fisher Funds said the phrase was too wide and subjective. “Taken to the extreme, no adviser would give any advice without an incentive of some kind, and therefore any misconduct could be said to have been induced by the incentive,” the fund manager wrote.
“In addition, the same incentive could encourage different individuals differently. While we are opposed to exclusively target/volume based commissions, we are supportive of incentives that integrate quality measures based on advice and service offered together with some targets.”
First NZ Capital agreed it was not sufficiently clear. “We submit that the definition be revised, or further detail is provided for the purposes of making the determination. One option may be to prohibit incentives that will or may eventuate in unlawful behaviour, or alternatively, incentives that would not be disclosed in accordance with the disclosure provisions, being in the interests of transparency. The basic premise being, if it is hidden it is most likely to be inappropriate. Industry integrity is paramount.”
First NZ said, when the line was drawn, it should apply across the industry, even to those who are not currently covered by the FAA regime. Sovereign said the duty should apply equally to advisers working for financial advice providers. AMP agreed: “Incentives to financial advisers are as, or more, prone to driving undesirable behaviours. Further, with the desire to have similar standards applying to advice, applying similar standards to incentives seems to have been overlooked.”
AIA said there was a risk that the duty could effectively prohibit any sales-based performance commission.
But Partners Life said it would have a positive impact. “At present, QFE advisers are incentivised to drive up the volume of sales without advice, despite this not necessarily being in the client's best interests.”
An MBIE spokesperson said it was in the process of analysing the submissions.
“Once drafting of the bill is complete, it will be introduced to parliament and the normal parliamentary process for the passage of legislation will begin. This will include a select committee process which will provide a further opportunity for public submissions on the bill.”
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Comments from our readers
An education and networking adviser conference in Wellington open to all staff doesn’t sound inappropriate. But what about an adviser conference somewhere more exotic like Fiji which includes spouses and the attendees have to earn the right to be there through sales targets? Paying generous salaries doesn’t sound inappropriate. But what about a bonus scheme directly linked to sales volumes of in-house product?
Should the FMA have to prove that the incentive given actually caused inappropriate selling? Or should incentives that may possibly influence behaviour be banned – is the possibility of creating a conflict enough to put a stop to it? And what about a series of small payments or benefits given over a long period where each in isolation looks innocuous – should they be treated as one single benefit for testing if they are inappropriate?
This is a debate the industry absolutely needs to have to set sensible boundaries. Inappropriate incentives should be banned – we just need to figure out the fine print of what that means in practice….
For example 2 advisers have the same incentive, say a fully paid trip overseas, for meeting a target. Both meet the target but by different methods. Adviser one gets up off the couch and works hard and sells the right products to the clients for the right reasons to meet the target. Adviser two takes the easy route and sell anything to anyone just to meet the target.
Surely adviser one's reward would not be seen as inappropriate whereas adviser two's reward is no doubt inappropriate.
The question is who decides - the FMA? or the provider of the reward? and how?
Maybe providers will have to look far more closely at lapses, cancellations, customer feedback and even new business (to weed out churning) and add extra criteria to incentives rather than straight sales targets.
Regards
Brent
I don't think the commentator who says "this principally means ensuring advisers “don’t receive incentives for acting against their clients’ best interest” is the whole story.
Yes it supports a desired narrative.
But if a retirement adviser acts against the best interests of her client, she is going to be liable whether she received an incentive or not.
The breach is acting against the "best interests."
Banks are not going to be banned from providing sales target incentives for their "advisers".
This is another example of bad regulation by the Government, the MBIE and the Regulator all of whom have been captured by the big end of town and clearly happy to talk the talk but not walk the walk.
That said - and in response to Murray's prediction - Independent Financial Advisers should abandon accepting these 'soft dollar' incentives.
I'd also suggest that FARs and their employing organisations should be permitted to offer such incentives and that they should not be required to adhere to an industry Code of Conduct which requires 'putting clients' interest first'.
The stated rejection of any inappropriate incentives and observance of a professional Code of Conduct should be the exclusive domain and the hallmark of Independent Financial Advisers.
Thereafter, the nascent Financial Advice NZ body should allocate resources to making the public aware that ONLY banks sales staff and other similar FARs accept such incentives and that they have no comparable standards or Code of Practice by which their conduct is governed.
In this way, the distinction between FAs and whatever term is decided upon for FARs can be publicised and brought to the consumers' attention.
There will be no other meaningful, tangible support for Independent Financial Advisers forthcoming. The previously anticipated promotion of AFAs simply did not occur.
I appreciate that this may be an unpopular view with some, but the attempt to dilute the advice process by homogenising all client-facing intermediaries does nothing but exacerbate the confusion consumers have expressed with the existing regulatory regime.
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