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:
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.
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.
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:
“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.
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:
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).
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 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).
The law applies equally to FAPs with respect to financial advisers they contract with (directly or indirectly). However, in the case of 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
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:
I recommend that any party who wants to terminate or cancel an agreement on that basis seeks legal advice before doing so.
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 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.
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