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FMA publishes review of adviser conduct in life insurance

22 March 2018

FMA publishes review of adviser conduct in life insurance

The FMA has issued warnings to four registered financial advisers in relation to providing advice on replacement insurance policies, for breaches of the obligation in section 33 of the Financial Advisers Act 2008 to exercise care, diligence and skill.

The warnings were announced in the report the FMA published today into its ongoing review of conflicted conduct and insurance replacement business practices among financial advisers.

The FMA’s primary concerns about replacement business practices are the poor outcomes for customers that can be driven by conflicted conduct. 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.

Today’s report follows the FMA’s 2016 review of these issues: Replacing life insurance - who benefits?

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 providers.
These incentives are the drivers of the poor conduct described in the report.

The key findings:

• Half of the advisers we reviewed were either not aware of the obligation, under section 33 of the Financial Advisers Act 2008, 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. We found that advisers in this review were poor at keeping records for the benefit of clients.
• Most of those advisers we 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 structure of this business model is based on the payment of commissions and incentives by providers to the advisers who sell their products. The upfront commissions that New Zealand providers are paying are high by international standards.
Liam Mason, FMA Director of Regulation 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.”

Background to the review

24 advisers were selected for review based on data from 2016. Further data was requested and our initial inquiries reduced this number down to 14 advisers where client files were reviewed and/or the advisers were interviewed. 10 were registered financial advisers and 4 were authorised financial advisers.

Authorised financial advisers are held to minimum competence standards and a code of conduct, whereas RFAS are not. With the majority of our inquiries focused on RFAs, who have no obligation to a conduct code to put their clients first, there is no legal basis for determining whose interests were being prioritised when RFAs recommended replacing insurance policies.

All financial advisers are subject to the conduct obligation as set out in Section 33 of the Financial Advisers Act. However, a breach of this section of the legislation is not an offence. This means the tools available to the FMA to respond to breaches of section 33 are administrative powers, such as warnings and directions in writing under section 49 of the FA Act.

As well as issuing four private warnings the FMA issued compliance letters to six registered financial advisers and one authorised financial adviser. Inquiries into three authorised financial advisers remain ongoing. Two registered financial advisers are also subject to ongoing inquiries for other conduct reasons unrelated to our replacement business review.

Next steps

Changes to the Financial Advisers Act are currently being considered by Parliament through the Financial Services Legislation Amendment Bill. Proposed changes to the FA Act would discard the RFA model and require all financial advisers to meet minimum standards of competence and conduct. The FMA would also have a wider range of regulatory responses to respond to similar misconduct.

The FMA is conducting a separate review of insurance sales practices at Qualifying Financial Entities (QFEs) which employ different incentives structures. The FMA will report on the findings of these reviews.


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