The FMA has warned insurance advisers over conduct in their report on Life Insurance Replacement business released this morning
Four registered financial advisers (RFAs) have been warned by the Financial Markets Authority (FMA) for providing advice on replacement insurance policies, and for obligation breaches under the Financial Advisers Act (FAA) to exercise care, diligence and skills.
The FMA announced the warnings in its Life Insurance Replacement Business report – released this morning – that states the regulator’s primary concern with replacement business practices were poor outcomes for customers that can be driven by conflicted conduct, such as advisers receiving soft dollar incentives including overseas trips to write business with specific insurance providers.
Advisers can earn significant upfront commissions – up to 230% of the first year’s premium of a “new” or replacement policy – and other additional incentives such as qualifying for overseas trips, the FMA added.
The FMA selected 24 advisers for further individual reviews using the data from the 2016 review, based on the timing of replacement policies being sold and the incentives offered by insurers such as overseas incentives (trips).
The report’s key findings:
- Half of the advisers we reviewed were either not aware of the obligation, under section 33 of the FAA, to exercise care, diligence and skill, or they were in breach of that obligation.
- Record-keeping is part of these requirements. Records of advice are essential to help clients make informed decisions and be able to understand the advice they are getting. The FMA found that advisers in this review were poor at keeping records for the benefit of clients.
- Most of those advisers the FMA reviewed and interviewed failed to recognise that incentives create a conflict with the interests of their clients.
- The industry – especially insurance providers – must take more care and responsibility for the outcomes and conduct that are driven by their sales incentives.
The distribution model of insurance policies through advisers is the driver for the FMA’s concerns around conflicted conduct in this report, the regulator said.
The structure of this business model is based on the payment of commissions and incentives by providers to the advisers who sell their products.
The FMA said the upfront commissions that New Zealand insurance providers are paying advisers is high by international standards.
FMA Director of Regulation Liam Mason said, “The failure to exercise care, diligence and skill for their clients was a consistent finding in our review of 24 advisers. Among the 24 advisers who were subjects of this round of inquiries, it was both striking and concerning that many of them did not even recognise that conflicts of interests can arise from incentives and commission.”
“The majority of these advisers were RFAs, and this was the first time many of them had been in contact with the FMA. We used the tools available to us to respond to the conduct issues we found in the most proportionate way.
“While the focus of our inquiries was the conduct of financial advisers, we have also been reviewing the practices of providers and qualifying financial entities that produce and sell insurance products,” Mason added.