Life and health insurers spend 9% of their sales revenue on soft commissions for the advisers who sell their products; FMA warns of conflicts of interest

The Financial Markets Authority (FMA) has for the second time in two months sounded the alarm bells over insurers paying financial advisers commission for selling their products.

The regulator has found that in the two years to March 2017, nine of the country’s major life and health insurers spent $34 million, or 9% of the revenue they received from new product sales, on “soft” commissions like trips, tickets to events, and gifts.

This is in addition to the monetary commissions they paid advisers. The upfront commissions advisers receive when they sign up new policyholders can be worth up to 200% of a policyholder’s annual premium.

In one soft commission case, an insurer spent $1.9 million to send 20 advisers to London for a holiday and to do some professional development. This equates to $95,000 per adviser.

The average amount insurers spent on trips was $22,000 per adviser.

Altogether insurers put 242 different soft commission offerings on the table. One offering could include tickets to an overseas conference for hundreds of advisers.

Nearly half of all these soft commissions required advisers to sell a certain number of products or products worth a certain amount of money.

The FMA, in a blistering new report, said these targets were the drivers of the poor conduct it saw.

It said insurers were “designing incentives that potentially set advisers up to fail in complying with their obligations… to exercise care, diligence and skill”.

It noted conflicted advice could leave customers over or under-insured, or see them buy a policy with exclusions for conditions they were previously covered for, or features they don’t need.

Furthermore, it said insurers may be passing on the cost of soft commissions to consumers by charging them higher premiums.  

Timing crucial

The FMA said its warnings to insurers about commissions and conflicts of interest had largely fallen on deaf ears in recent years, and it wasn’t clear whether advisers disclosing the soft commissions they received to their clients effectively managed conflicts.  

This is an important observation because requiring more advisers to disclose conflicts of interest in greater detail is one of the main ways the Government is working to improve the financial advice sector.

More disclosure, rather than a ban of commissions, is at the heart of the Financial Services Legislation Amendment Bill.

The other core part of the proposed legislation is a requirement for all advisers to put their clients’ interests first. Currently most of the advisers who sell insurance (IE Registered Financial Advisers) don’t need to do this. Nor do they need to disclose how they’re paid.  

Before introducing the Bill to Parliament in August 2017, the previous National-led Government decided that following the UK and Australia in banning or capping commissions would reduce the access the public had to advice, as they would have to pay [more] for it.

The new Labour-led Government has supported this position; the Bill passing its first reading in December, after the September 2017 election. 

Currently, it is before a select committee and the Government is consulting with the public on exactly what tougher disclosure requirements should look like.

All this is happening against a backdrop of the FMA and Reserve Bank formally asking banks and insurers to prove New Zealand doesn’t need to follow Australia and have a royal commission on financial services.

Talking to Radio New Zealand about the matter earlier this month, FMA CEO Rob Everett said: “Most of what seems to go wrong in financial services comes off the way people get paid; the way they get incentivised to sell product; to give advice.”

Findings in detail

Coming back to the report, the FMA used data from AIA, Asteron Life, AMP, Fidelity Life, nib nz, OnePath, Partners life, Southern Cross and Sovereign in its study.

It found that over the two years to March 2017, insurers spent:
- $18m on trips, including one to Queenstown where advisers were taken heli-skiing, on a wine tour and a motorsport driving course;
- $5.5m on professional development;
- $3.8m on events;
- $3.5m on “other” soft commissions like contributions to superannuation schemes or professional association membership fees;
- $1.7m on sponsorship towards things like golf tournaments and conferences;
- $1.6m on gifts, rewards and prizes;

The amount different insurers spent on soft commissions varied. While one spent only $209,000, another spent $12m (over a third of the total spend for all insurers).

Around 3,000 advisers received tickets to events and a similar number received gifts, rewards or prizes. Only 800 advisers were sent on trips, despite this being the most costly type of soft commission.

Two insurers told the FMA they no longer offered some types of soft commissions (interest.co.nz believes AMP is one of these). One of them said its decision to do so had seen its sales drop by a third.

“This suggests that soft commissions definitely have an impact on adviser behaviour, and that in some instances advisers are acting in their own interests, rather than their customer’s interests,” the FMA said.

While it found that insurers’ sales would only increase by between $1 and $8 for every $100 they spent on soft commissions, if insurers didn’t provide soft commissions this would materially decrease their sales.

So the role of soft commissions was largely to encourage loyalty among advisers.

“Advisers may be incentivised to place all, or a majority, of their new policies with a particular insurer – not due to a particular soft commission being offered at a point in time, but because of the wide range of benefits that can be obtained over the long term.”

The data also showed that insurers’ sales peaked around the sales target deadlines they set advisers.

On the upside, the FMA found there was no correlation between soft commissions and the quality of products sold.

It found that while only 42% of available products had been reviewed by independent research companies that advisers used, 81% of the products advisers sold had been reviewed. And of these reviewed products sold, three quarters received high ratings.

The FMA concluded: “At the heart of our concerns is the established distribution model for the sale of insurance policies, which includes commissions (monetary and nonmonetary)…

“Our view is that it is the responsibility of insurers to measure and manage the impact of incentives on advisers’ behaviour and consumer outcomes.”

The FMA plans to meet with insurers to “ensure they recognise our expectations”.

It will also publish the results of a study on Qualifying Financial Entity (QFE) insurance providers’ replacement business, and the structure of bank incentives in the sale of financial products.