Financial adviser target-based incentives banned from 31 March 2025

From 31 March 2025 the law will prevent financial advice providers* (“FAPs”) from providing most types of direct target-based incentives (based on volume or value metrics) to financial advisers, the direct managers of employed advisers, and others. In this article I consider how this law applies to FAPs and their financial advisers.

Wednesday, February 12th 2025, 9:00AM

by Simon Papa

Article written by Simon Papa - Director at Cygnus Law Limited

From 31 March 2025 the law will prevent financial advice providers* (“FAPs”) from providing most types of direct target-based incentives (based on volume or value metrics) to financial advisers, the direct managers of employed advisers, and others. In this article I consider how this law applies to FAPs and their financial advisers. This is summary information only, does not consider all relevant law, is not legal advice and is not a recommendation (including regarding the suitability of any course of action).

* Note: Authorised bodies under a licensed FAP are themselves each a FAP.

That law applies to incentives provided in relation to financial advice products (including insurance, consumer loans and various types of investment products) issued by registered banks, licensed insurers and licensed non-bank deposit takers (“financial institutions”). That law does not apply to incentives provided in relation to:

Financial advice products issued by businesses that are not financial institutions.
Financial advice services paid for directly by clients.
Non-consumer financial advice products (for example general insurance contracts for businesses) and non-consumer credit contracts.
Services provided to “wholesale” clients (this category largely overlaps with the definition of “consumer” products used in the law).

The financial institutions are subject to the same law (which in their case applies to a wider range of products and also to many of their services) with respect to incentives they provide to their own financial advisers, to FAPs and to others. They have additional obligations under “conduct of financial institution” law that comes into force at the same time, which requires them to be licensed to operate “fair conduct programmes”. In practice, many financial institutions have already stopped providing prohibited incentives to their own staff and to FAPs.

Where can you get more information on prohibited incentives?

The law includes examples that help to explain how the law works in practice (but that doesn’t guarantee compliance- always consider the full context). The Financial Markets Authority provides limited information through FAQs (https://www.fma.govt.nz/business/legislation/conduct-of-financial-institutions-cofi-legislation/) and commentary on definitions (https://www.fma.govt.nz/business/legislation/conduct-of-financial-institutions-cofi-legislation/key-terms-under-the-cofi-regime/). You can ask FMA if it will provide specific guidance. The relevant financial institutions, dealer groups and aggregators will likely be able to provide further information. You can seek legal advice as required.

Who does the law apply to?

The law prevents incentives being provided to anyone “involved” in the provision of regulated financial advice services, and to immediate managers of employed advisers (I consider that later). “Involved” is defined as where someone does one or both of the following:

“Arranges” a contract for the acquisition of a financial advice product.
Gives regulated financial advice in relation to the product.

“Arrange” is defined as including “to negotiate, solicit, or procure the contract”. Distributing an advertisement or other promotional material does not, in itself, constitute being “involved”.

There is potential for non-advisers to be captured, if they are involved in “arranging” contracts.

For employees of FAPs (including employed financial advisers) the scope is even narrower. FAPs are only prevented from providing incentives to employed advisers if the employee is both “involved” in the provision of the financial advice service (the default threshold) and in direct contact (whether in person or remotely) with the client or any person who acts on behalf of the client. This is to help to ensure that FAPs (or other entities or individuals subject to this law) can provide target-based incentives to non-involved employees.

What is a prohibited incentive?

Subject to some exceptions (including those I note below), the law prevents the provision of an incentive to financial advisers and others (see above), if the “entitlement” to the incentive, or the “nature or value” of an incentive, is determined by “direct” reference to volume or value of the relevant financial advice products. This is referred to as a “prohibited incentive”. Incentives include monetary payments such as commissions, and non-monetary incentives such as trips, conferences and professional development. The law clarifies that reference to volume or value includes:

Reference to numbers of customers or products.
Amounts related to financial advice products (e.g. the value of loans) and amounts payable in connection with financial advice products including fees, charges and premiums.
Comparable performance measures, for example payments linked to a position on a leader board.
Reference to avoiding or preventing something in connection with the volume or value of financial advice products. In its FAQs FMA notes that a persistency bonus in relation to insurance policies is a prohibited incentive if it is payable on the condition that “a certain percentage of products have not been cancelled within a set period. For example, an employee is given a bonus if 85% of life insurance policies sold in the past three years have not been cancelled.”

The law applies even if the incentives are provided by financial institutions indirectly, for example through a network or aggregator.

Quality targets that do not relate to volume or value of products are permitted. That includes targets based on customer satisfaction and compliance with law and advice processes. However, a prohibited incentive is still prohibited even if performance is assessed against, in part, metrics other than the value or volume of products (such as the quality measures noted). So, use of a “balanced scorecard” is not permitted, to the extent it permits the provision of prohibited incentives. However, a balanced scorecard is potentially permitted, if applied in compliance with the limited exception that allows use of a single volume or value-based target for employed advisers (see below).

What are the exceptions?

There are some exceptions that permit prohibited incentives to be provided. The key exception is that the law permits the provision of “linear” incentives. That is, incentives provided on a per product basis. So, for example, a FAP is permitted to pay a financial adviser a proportion of the commission received with respect to a specific loan or insurance policy that the adviser gave advice on.

There is a limited exception in relation to employed advisers. A FAP can provide employed advisers with an incentive based on a direct reference to a target (or other threshold) that relates to the volume or value of the products, as long as both of the following conditions are met:

The employee must also receive an incentive calculated on a “linear basis” (see above).
The FAP must pay the employee a monetary benefit that is not an incentive (e.g. wage or salary) and that monetary benefit must be paid for being involved in the giving of financial advice.

The example given in the law of this type of permitted target-based incentive is as follows:

An employee of a financial advice provider has a base salary of $50,000. In addition, the employee receives a commission of 5% of every dollar’s worth of all sales in a quarter if the employee hits a target of $100,000 in a quarter. The $100,000 target is the only target that relates to the volume or value of the relevant services or associated products. The employee’s sales for a quarter are $200,000. The commission is $10,000 (5% of $200,000). The commission is not a prohibited incentive.

This exception was added to the law after various submitters on the draft law noted that an absolute ban on financial or other targets would harm competition and consumers (through less uptake of financial advice products such as insurance).

Can prohibited incentives be provided to contracted advisers?

The law applies equally to FAPs with respect to financial advisers they contract with (directly or indirectly). However, in the case of contractors:

The law applies regardless of whether or not the contractor deals directly with the FAP’s clients (which is a further threshold with respect to employed advisers- see above).
The exception noted above, which permits one non-linear incentive to be paid to an employed adviser, does not apply to contractors.

This applies to contractors that are either individuals or companies. Contractors are themselves subject to the law and so are prevented from providing prohibited incentives to their own personnel and others. This is likely most relevant to company contractors that operate as service vehicles for financial advisers. Such companies cannot provide prohibited incentives to their own advisers who are involved in the provision of financial advice services

What happens to existing agreements that require provision of prohibited incentives?

The law governing prohibited incentives comes into force on 31 March 2025. From that date, any part of an existing agreement requiring that a prohibited incentive be provided cannot be applied or enforced by any party, except for amounts that became payable before 31 March 2025 (even if not paid at that date).

The law deems that a FAP that stops providing a prohibited incentive from 31 March 2025 will not be in breach of the relevant agreement that requires that the prohibited incentive be provided. However, a party to such an agreement may be able terminate or cancel such an agreement from 31 March 2025, if:

the parties to the agreement have expressly or impliedly agreed that the provision of the incentive is essential to that party;
the effect of the loss of the prohibited incentive will be to substantially reduce the benefit of the agreement to the adviser; or
the effect of the loss of the prohibited incentive will make the benefit or burden of the agreement for that party substantially different from that agreed to.

I recommend that any party who wants to terminate or cancel an agreement on that basis seeks legal advice before doing so.

Are incentives provided to managers captured?

The intent of this law is that senior managers can still be provided with target-based incentives. That’s the case as long as a manager is not “involved” in the provision of financial advice services (see my comments on the meaning of “involved” above). However, there is an exception for “immediate managers”.

If the law prevents a FAP from providing prohibited incentives to one or more of the FAP’s employees, then the FAP cannot provide prohibited incentives to any “immediate manager” of such employees, if both of the following apply:

The manger’s entitlement to an incentive, or the nature or value of the manager’s incentive, is determined or calculated in any way by reference to the performance of one or those employees.
The performance of one or more of those employees is assessed in any way by direct reference to a target or other threshold that relates to the volume or value of relevant services or associated products (as noted, that is permitted to a limited degree).

The law clarifies that an incentive for an immediate manager is not prevented just because the incentive is based on market share, profit, or any other similar measure of financial performance. However, a prohibited incentive can still arise in other ways.

The example in law of a permitted profit share target is:

A manager is entitled to a bonus if a company’s net profit exceeds $5 million. The volume or value of services or products that the company sells affects the company’s profit, but this does not mean that the incentive is determined or calculated by reference to a target or other threshold that relates to the volume or value of services or products.

Simon Papa is a Director at Cygnus Law Ltd.

Tags: FAP financial advisers