Advisers' incentives in Govt sights

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The Government wants a ban on soft commission and for advisers' remuneration structures to be designed with customer outcomes in mind.

Saturday, April 27th 2019, 11:27AM 1 Comment

It has released an options paper for its review into the conduct of financial institutions.

Commerce and Consumer Affairs Minister Kris Faafoi said improved protections were needed to ensure customers got a fair deal and appropriate services.

“Everyone should be able to rely on their banks and insurers. Unfortunately while some have put consumer interests first, the recent reports by the FMA and RBNZ showed that there major issues in the life insurance sector and poor conduct and culture in the banking sector that needed to be addressed," he said.

“What we propose is a suite of new measures that will put the consumer at the heart of decision-making and make good outcomes the bottom line. These measures include a ban on target-based remuneration and incentives, imposing new legal duties on financial institutions and ensuring products sold to consumers are fit-for-purpose and sold to the right people.

“We are also going to create new enforcement tools so that when these rules aren’t met, providers face appropriate consequences.”

The options paper said Government was not considering a total ban on adviser commissions because there was a risk it would reduce access to financial advice for consumers and limit competition in the market.

But there were issues with commission, it said. High upfront commissions could encourage churn and when different rates were paid for different products there was an increased risk that advisers would act in their own interest.

It wants to get rid of soft incentives and sales target-based remuneration and for remuneration to be structured in a way that is likely to promote good customer outcomes.

"A bank or insurer should be able to explain why it believes its approach to incentives is aligned to good customer outcomes. This includes the effect that remuneration and incentives have on which services and products are recommended to customers, and how any staff performance benefits are disclosed to and discussed with the customer. This could be assessed against the regulator’s expectations of what would sustain good customer outcomes."

Another option proposed, though not included in its preferred package of options, was to impose parameters on the structure of commissions to advisers, as in Australia.

The options paper said this could reduce the likelihood of behaviour that drove poor customer outcomes while still retaining access to financial advice and could encourage advisers to be incentivised for providing ongoing service and and advice.

But it was challenging to set the right levels and could encourage advisers to sell more because they were paid less. It could also make it harder for new entrants to come into the industry.

The paper said rules were needed because existing self-regulation had limits. There were inherent conflicts of interest because industry bodies were funded by their members and represented their industry. "It also means that industry bodies are unlikely to be particularly proactive in identifying and penalising poor conduct. The penalties available under self-regulation (in the vicinity of $100,000) are also insufficient to provide a significant deterrent to large financial institutions."

It proposes some overarching duties to apply across the industry, including things such as a duty to consider and prioritise customers' interests, to act with due care, skill and diligence, pay due regard to the information needs of customers, have systems and controls in place to support good conduct and a duty to ensure complaints handling is fair, timely and transparent.

To improve product design, the paper said the regulator could be given the power to ban or stop the distribution of a specific products, require manufactures to identify the intended audience for products and a requirement for distributors to have regard to that when placing the product.

Submissions close on May 31.

MBIE has released a separate options paper as part of its review of insurance contract law. 

Tags: insurance insurance law Kris Faafoi MoBIE

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