FMA: Advice processes pose risk to consumers
The Financial Markets Authority says it has poor governance of sales and advice in its sights over the next year.
Wednesday, July 24th 2019, 6:00AM 
1 Comment
Rob Everette
The Financial Markets Authority has published its latest annual corporate plan, which outlines its work plan for the next financial year and sets objectives for raising standards of behaviour across financial services.
Chief executive Rob Everett said: “We have introduced a sector-based approach to provide a clear indication to stakeholders of the priority risks we want to address and the activities we will undertake to achieve our goals in the specific sectors we regulate. Our new approach reflects the maturity of the Financial Markets Conduct Act regime and our broadening focus on the treatment of investors and customers.”
One of the “sector approaches” it outlines is sales, advice and distribution.
It wants to see a new advice regime that improves access to quality advice; firms and advisers meeting the new advice requirements, and having sales and adviser practices and remuneration structures that promote customer-centric outcomes; as well as credible regulatory deterrence of misconduct on the perimeter – such as those offering unlicensed advice or other unregulated investment service. That would include activity driven by new technology, the FMA said.
It noted that there was weak governance and poor culture, increasing the likelihood of misselling and harm to customers, there were inappropriate incentive structures and poor disclosure of those to customers.
“Low investor engagement and understanding may result in the uptake of unsuitable products or inappropriate investment decisions.”
Everett said the implementation of the new financial advice regime would be a significant piece of work for the FMA.
“We will also work closely with the Government and industry to prepare for and implement any changes to the conduct regulation regime for banks and insurers.
“Our ongoing work with the Reserve Bank of New Zealand on the conduct and culture reviews of the banking and life insurance sectors reflects our overall objective to improve standards of behaviour and ensure all providers are serving the needs of their customers.
“We expect all market participants to review the risks we’ve identified in the sectors that impact them, assess the relevance of these risks, and what they are doing to mitigate them. Market participants should not be waiting for legislative changes, or the regulator to come knocking, to do the right thing."
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1. There has been no statistically significant evidence presented to establish that the non-aligned distribution channel has missold or harmed customers.
2. Reprinting the international comparison of the percentage of Annual Premium represented by commission is misleading and is not a true comparison. Costs still borne by many product providers overseas have long since been transferred to independent advisers in NZ. The true expense figures will likely be comparable.
Interestingly, from the same source, over half the territories cited in the graph record declining penetration levels of life insurance over 10 years By population the reduction in penetration levels is even greater. In Holland which banned commissions altogether, the penetration level has collapsed.
I suspect that the cost of acquisition - of which commission is a component part - is broadly similar across a number of OECD territories.