Two big questions in conduct law causing advisers concern, and its unintended consequences

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.