Two big questions in conduct law causing advisers concern, and its unintended consequences
The Financial Markets (Conduct of Institutions) amendment Bill raises a big question about the future of commission.
Monday, March 30th 2020, 10:35AM 
4 Comments
by Russell Hutchinson
Russell Hutchinson
The draft allows that the FMA will have the power to regulate incentives, and defines incentives clearly including the definition of commission (in section 446P). The effect is that the FMA will have the power to ban all commissions if it wishes.
While MBIE assured Katrina Shanks at Financial Advice New Zealand that the commission model was not under threat, only incentives tied to volume and value-based targets would be the subject of a ban.
The uncertainty faced by advisers that receive commission is that they don’t know whether their future income stream is likely to be cut off, suddenly, by regulation. The effect of the uncertainty pushes a curious unintended consequence – taking more commission up-front. After all, if you can’t be sure if you will continue to receive your renewal commission, why would you opt for more spread commission? The logic runs, best to take it all upfront now. Which I don’t think was exactly the intention.
That this comes at the same time as several insurers are issuing new agency terms adds to the concern. Most new agency agreements envisage servicing responsibilities, but do not define these well, as requirements are not yet worked out, and would depend on the conduct programmes required by the new law to be agreed between the provider and the FMA. These agreements appear to be incompatible with two less common, but still well-used, approaches to distribution.
The first is point in time fee-based advice. A client approaches an adviser, they agree a fee, and advice is given. There is no contract for future advice, and a product may, or may not, be taken up.
Previously an adviser may have been paid a renewal commission and waited for the client to approach them again for further advice. Providers, pushed by what they expect to have to provide in their conduct programmes, and now likely to push a service requirement to advisers.
The second is with no-advice distributors. New agreements require distributors to be Financial Advice Providers and retain this status. Currently quite a few distributors offer no advice. It appears that they will have to negotiate separate contracts with insurers. Insurers are permitted to work with non-FAP intermediaries, although if they do, they will have to take more responsibility for their activities.
Overall the combination of these factors is causing some anxiety about the medium-term value businesses that are based on commission. The one being talked about it dealer groups. But the bigger impact is on commission-based (mainly insurance) advice businesses.
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I'm not sure about that. And the brain surgeon would do it with the engine running, to boot!
Now if you had said a 19th century farrier instead of a brain surgeon......
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Section 446 in particular is a proposed policy to entirely ban commissions from the industry. The assurances from policy crafters that "it is not intended to be that" or from the Minister that "we have no intention of stopping commissions for now" do not provide any reassurance to industry at all.
Why write the provision into a proposed law if there is no intent to use it?
Amidst all the disruption, margin pressure and escalation of cost experienced by financial services we have a potential time bomb that (if enacted) would destroy thousands of distribution businesses and severely limit the access to advice or assistance for hundreds of thousands of NZ consumers.
But that's ok, right? Because nobody intends to apply it the way it is worded.
It is just a random (and probably completely daft) suggestion: but if a piece of law contains words that no law-maker wants to see used, why not remove those words entirely?
That would provide some genuine reassurance wouldn't it?