[The Wrap] Soothing words from the minister

While the Minister and regulators are making "soothing noises about commissions not being necessarily bad, they cleverly aren't saying anything about the level of those commissions.

Life insurance is the normal whipping boy, with a lot of rhetoric about rates of 200% and more.

The Minister and officials have not opined about what they think is an appropriate level.

If for example, they were simply to say that since in Australia from next year, first year commission will be restricted to a maximum of 60% - therefore we think NZ should be maximum 60%, then I reckon there would be a universal outcry.

It is often completely overlooked that Commission levels are actually set by the insurance companies - not the life agents. Surely these life companies have been run sensibly (none to my knowledge have financially collapsed) so how could any official say that the current rates are too high - do they know more about running an insurance companies? I very much doubt it.

Re soft commissions, I was very surprised that the life companies rolled over so easily and cancelled future overseas trips. A lot of industries have incentive conferences and rugby tickets etc. Probably fewer than 15% of life agents ever qualified for them - ie 85% didn't, and yet they became the target.

Free markets usually end up providing the most choice and the best products for consumers.

Completely agree Murray. The insurers have taken the opportunity to kill off the trips, they're costly and a hassle to plan, run and manage.

The FMA report demonstrated two things, soft dollars were expensive and they didn't sway the advice of quality and appropriate products.

So the business decision is why have the added cost and hassles, when they don't change the advice outcomes.

We know trips have the perception of driving business, more a case of aligning business when there is a competitive market.

Take the trips away and we’ll likely see little change in the placement of business on the whole.

We may see more of a spread across companies, though habits and ease from familiarity are likely to result in much the same distribution.

Time will tell.

Apposite commentary from commentary in ifa Bulletin

Risk by Adrian Flores - March 22, 2019

Life commissions ‘good for consumers’, says licensee

A licensee head has called for life insurance commissions to be retained, arguing that they are “good for consumers”.

The Hayne royal commission final report recommended to ultimately reduce the cap on life insurance commissions to zero unless there was “a clear justification for retaining those commissions”.

But in a contributed blog, Synchron director Don Trapnell said he had a clear justification of retaining life insurance commissions.

“Life insurance commissions are good for consumers. Yes, good,” he said.
“What happens when you take away life insurance commissions is that consumers do not seek out and pay for life insurance advice.”

Mr Trapnell cited the experience in the Dutch market where commissions were banned.

He said that in the Netherlands, advice is now only sought and paid for by the wealthy, not the everyday consumer.

Because it is restricted to those who probably need it the least, Mr Trapnell argued that those who probably need life insurance advice the most have to resort to getting advice over the back fence and purchase products online or over the phone.

“We all know from the royal commission how well that goes. Not well,” he said.

“Ban commissions in Australia and you can expect similar outcomes – many everyday Australians just won’t be able to afford to pay, or would be unwilling to pay for advice upfront from their own hip pockets.

“They will therefore have to be content with the cover they have in their super funds, if any, take life insurance tips from their mates and buy direct or go without. How is this a good outcome?”

I suspect Don Trapnell is referring to the Oxera Report - https://www.oxera.com/publications/regulating-remuneration-systems-effective-distribution-of-financial-products/ - which confirms his statements on the Dutch experience. In addition, the British FCA is considering re-introducing commissions (still??). The overall conclusion is that regulating commission may not deliver the expected results. That said, I believe MBIE and FMA are aware of this and calling for a review of potentially conflicted remuneration requires a measured, considered, and thoroughly researched response. The subject has been raised and is on the table for the industry to articulate the rationale behind retaining commissions based on the value of the adviser/client relationship.

@DC and Murray: good discussion.
Interesting development out of the ARC was the $70M funding boost and a three-year 'probation' given to ASIC. And this is their response: Ex Footy hard-man and night club bouncer, QC Daniel Brennan, who is now ‘Head of Enforcement Action’
https://www.smh.com.au/business/banking-and-finance/we-should-be-feared-former-bouncer-turned-corporate-cop-wants-justice-20190321-p516dl.html

DC links to a report from 2015, which says on P4
"As most regulatory restrictions on commission payments are recent, it appears to
be too early to fully assess their impact. In the Netherlands, for example, the
regulator plans to wait until 2017 to conduct its post-implementation review. There
has been a significant reduction in the number of brokers in the UK, particularly
with regard to the banking sector, although these changes are also due to other
regulatory changes.
Restrictions on commission payments may lead to adverse implications, including
higher prices for advice to less wealthy consumers, reduced demand for financial
advice, and increased demand for execution-only products. A commission ban
could also distort competition between distributors."
As at 2015 it was Too Soon, then. So I'll submit my own link that Trapnell may also have seen, in which Fred De Jong reviews the Netherlands' commission ban in November 2017 and finds:
- Consumer confidence in insurers and advisers was low, and post-ban has fallen further.
- Pricing for insurances and mortgages did drop, but not much, and within 4 years had returned to pre-ban levels.
- Also that VAT is waived on many fees.
- Commission on non-life (fire) insurances is still in play.
https://www.researchgate.net/publication/327933069_A_commission_ban_for_financial_advice_Lessons_learned_from_The_Netherlands

@DC the rationale behind retaining commissions is this: The key lessons from the Dutch and Australia being that banning commissions is not a remedy for market and regulatory failures. The Aussies seem to be just working that one out.

I'll go one further. Another rationale is shown in this study, which builds empirical evidence, perhaps for the first time ever, around price sensitivity in consumers regarding paying fees for financial advice as the ARC recommends, and the Dutch implemented. It also suggests that under a fee-only model Advisers may not be willing to learn about the most suitable products for their clients. In other words, not only do those who benefit most from advice have less access and ability to get it, but the quality of advice itself suffers.
Stunning findings:

https://efmaefm.org/0efmameetings/EFMA%20ANNUAL%20MEETINGS/2018-Milan/papers/EFMA2018_0294_fullpaper.pdf