Advisers, not consumers benefit from soft commissions: FMA
Insurers' soft commissions and sales incentives may be setting advisers up to fail in their obligation to exercise care, diligence and skill for their clients, the Financial Markets Authority says.
Wednesday, May 16th 2018, 3:00PM 
11 Comments
by Susan Edmunds
It has released its report into soft commissions.
It follows its investigation into replacement business and insurance “churn” and was in part prompted buy the International Monetary Fund’s assessment of the financial sector in 2017. That report recommended the FMA refine its supervision by enhancing insurance intermediary and insurer regulation and supervision.
The FMA said it was interested in soft commissions because they presented a conflict of interest for advisers, which its earlier work had indicated some advisers were unaware of their need to manage.
The regulator found that insurers offered 242 different instances of soft commissions to advisers over a two-year period.
More than 50% of the $34 million they spent on them was on trips, although they were only 29 of the instances of soft commission and only 800 advisers went on them.
They spent $5.5m on professional development and $3.8m on events for advisers.
The total spend on soft commissions was equal to 9% of the sales revenue that insurers received in the same period from policy sales by advisers.
Nearly half of the soft commissions, and all of the trips, required advisers to meet a target.
One insurer spent $209,000 while another spent $12 million on soft commissions. In one case, a trip to London cost $95,000 for each of the 20 advisers who went. The average value of each trip was $623,000 or $22,000 per adviser.
"Overall we found the financial benefit to insurers from providing soft commissions is small," the FMA said.
"This suggests that there are other non-financial reasons for insurers to continue offering soft commissions to advisers. One potential reason is that it results in increased loyalty from advisers. This is particularly the case where insurers require advisers to place a certain percentage of their business with the insurer to receive the soft commissions. Another potential reason is that insurers pay soft commissions to maintain their market share and competitive position against other insurers.
"We are concerned that insurers are designing incentives that potentially set advisers up to fail in complying with their obligations. Advisers have an obligation to exercise care, diligence and skill and this, in our view, requires adequate management of conflicts of interest. Authorised Financial Advisers (AFAs) also have a code of conduct that they must comply with. Insurers must, for their part, take responsibility for conflicted conduct that results from these incentives."
When one insurer stopped doing trips during the period, its sales fell by a third.
"The FMA expects insurers to consider the number and nature of soft commissions they provide to advisers, to ensure risks to customers from conflicted conduct are minimised. Based on the information analysed, advisers seem to be the main beneficiaries of the soft commissions provided by insurers - it is difficult to discern any direct benefit to consumers," said FMA direct of regulation Liam Mason.
"However, insurers themselves must acknowledge the need to promote good customer outcomes and take responsibility for conflicted conduct that results from these incentives.”
The FMA will show the findings of the review to MBIE.
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Comments from our readers
in the habit of rewarding me for that in fact quite the opposite.
But nothing relating to the Royal Commission in Australia
They wouldn't be trying to change the subject, would they ?
Whilst I don't take commissions at all, the soft commissions of $34 million seem to be trivial compared to the $5 billion (yes Billion) profits that the big four banks have made in NZ recently
and just how did they make such huge profits ?
Perhaps the FMA can provide us with a breakdown of the bank profits
Might be very interesting
And bring the debate back to where it matters
i.e. the establishment of an NZ royal commission
And how would that % compare with % on rent or communications?
One has to assume insurers don't waste shareholders' money, so why should a regulator seek to control how much an insurer spends on any expenditure classification. We do still live in a free market don't we?
PPS don't insurers also take their own staff on these trips. Could that not be an incentive to encourage their staff to put in that extra effort?
PPPS which insurer spent the $12 million?
My plumber goes to LA, Vegas, Gold Coast etc courtesy of his suppliers.
My builder owns a much bigger boat than me.
My Vet keeps trying to sell me the most expensive flea treatment and food.
I need to ask all of them about their incentives.
Three paragraphs latter it is stated that when one insurer stopped doing trips during the period, it's sales fell by a third.
I would consider this to support the fact that insurers receive much more than a small financial benefit.
That said,I think the time is fast approaching when trips,based on production targets, will become a thing of the past.
As if there is... then possibly a problem... if not then it could just be advisers doing more and helping more people
Time the Insurance industry grew some balls and told them to pull their head in
It seems to me the FMA has too much time on its hands when it is concentrating on a very small part of the industry turnover and expenses.
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