The Nation: Kris Faafoi
On Newshub Nation Simon Shepherd interviews Minister for Commerce and Consumer Affairs Minister Kris Faafoi:
The banking and insurance industries have been under the microscope after two reviews discovered cultures of excessive risk taking and little accountability. Both industries have been asked to come up with ways to improve, but the government is also proposing changes. Commerce and Consumer Affairs Minister Kris Faafoi joins me to outline what they are. Excessive risk, taking accountability – what do you mean by that?
Kris Faafoi: Well, there was obviously some behaviour that both the FMA and the Reserve Bank weren’t happy about and around probably some of the remuneration and some of the sales practices that weren’t guaranteeing consumer outcomes. And there is little or no responsibility or accountability for senior managers or directors, either of life insurance or banks. And the proposals that we’re releasing today put out a discussion about some more accountability. And, you know, we’ve been having discussion with life insurers and bank hierarchy since those reports became public. They’re taking it seriously, we understand. Some serious discussions are being had around board tables. Because there is going to be more accountability on them when we decide exactly what the final policy will look like.
Okay, well, let’s drill down through some of that. I mean, you’re talking about some bad examples around incentives. What kind of things do you mean? What will the public have seen?
Well, look, we made it pretty clear when we released the life insurance report that stuff like soft commissions.
Trips to Rome once you, you know, meet a certain amount of policies that you’ve sold are really driving some incentives for salespeople that aren’t necessarily focused on the consumer. There are certainly some instances of that we’ve seen, both through the reviews and also instances that have been brought to us directly, where people are being sold insurance policies that they simply didn’t need, because some of the motivations of the people selling it weren’t necessarily because they needed the product that was being sold. So that isn’t about customer outcome, and certainly what we’re focusing on now is making sure that if there is a sale, whether it be a financial product from a bank or a life insurance product, that it is tailored to suit the needs of the customer.
All right. So what can you do about those incentives?
Oh, look, let me pre-empt one question, because I think there’s been some concern about whether or not commissions, for instance, will be banned, and that’s not what’s on the table. There are some options within the discussion document that we released, where there can be incentives of good outcomes for a commission structure. So, for instance, if you bought a policy now, the commission that you pay for can be for the sale of the policy, but also a tail commission, you can be paid for years after, because you’re meant to be looking after the customer. In some instances, the customer doesn’t get looked after at all. And one of the options within the discussion paper is well, maybe you might get the commission upfront for the sale, but the tail commission actually means that you have to engage with a customer to ensure that they’re looked after.
So you’re going to earn that commission ongoing?
Absolutely. And I think there’s some concern around those sorts of issues.
But the soft commissions you’re talking about, are you going to ban those?
Absolutely. We made that very clear when we released the life insurance review at the end of January that those types of, you know, you get a set of steak knives if you sell 20 policies, overseas trips to Rome, you know, Queenstown – all those kinds of things, those incentives are driven not by what the customer wants, but what the people who are selling those products want to achieve.
Aren’t you turning the industry on its head in terms of incentives? That’s how the industry works. So if you go and ban certain kinds of incentives, how are you going to get people to sell the stuff?
Because of the way the industry has worked, customer outcomes haven’t been focused on customer outcomes. And as both the FMA and the Reserve Bank found, if we don’t fill that gap or make these changes, we would get to the stage where we had a situation, like in Australia, where they had to have a Royal Commission. And we saw some very abhorrent behaviour by some of their financial companies about the kinds of products that were being sold and why they were being sold. So that review said to us if we don’t act now, we could get to that stage, so sitting here and doing nothing simply isn’t an option.
Another area where maybe the customers haven’t been the focus of the policy, this particular inquiry found that insurance companies are incentivised to underpay claims, and it’s hard for customers to fight that. So how are you going to change that?
Oh, look, I think around the insurance contract law review that you’re talking about there, there’s been for some time concern about a number of issues, for instance, disclosure. One of the ways we will tackle that is changing the onus on the insurance company to make sure they get the information. And I think that will have a better outcome on claims. Because at the moment, you’re either getting claims that are underpaid or claims that aren’t being paid out at all, and customers are left scratching their heads as to why they aren’t being covered. So we’re changing that onus on the company to ask the right questions of the customer, to make sure that everyone knows what exactly is covered. I think we’ll remove some of that uncertainty that we’ve got in and around payment time and claim time at the moment.
Okay. So you want more transparency there. But also this issue, though, I referred to – the incentivisation for the insurance companies to underpay claims. An example in the report that you released is after the Christchurch earthquake, one insurer on average assessed claims at about $300,000, and then revised average value is actually $727,000. It’s a $400,000 difference. So how has that been allowed to happen?
And there’s another stream of work that Megan Woods as Minister of Christchurch Regeneration and EQC looking specifically at Christchurch, because that has been an issue that has reared its ugly head, as you rightly point out, quite vehemently in Christchurch. I think what we’re looking at in terms of the changes with the FMA review and also the insurance contract law review is making sure we get the settings before you sign up to an insurance policy right, so we don’t get those kinds of out of whack results for consumers.
So are we going to be able to rebuild trust in the insurance industry?
Well, we have to, because I think it is definitely in the best interest of consumers, government and insurance companies to make sure that we have trust not just in insurance, but in the entire financial advice sector.
Well, let’s get to the entire financial advice sector, and that includes banks. Consumer survey out this week found one in five customers still being offered banking products they don’t want, so how hard is it going to be to change that kind of culture? It’s that upselling.
Yeah, and it’s going to take some time. And this legislation and regulation will change. And as I say, we’ve certainly spoken to insurance and bank hierarchy, who are taking it seriously. I think you need to take it in the context of some other changes that are happening and have already happened with the Financial Services Legislation Amendment Act now, which is going to put the onus on financial advisors, again, to work in the best interest of customers.
They should be doing that already, shouldn’t they?
You would have thought so, but it took that piece of legislation and the review from the FMA and the Reserve Bank to dig a bit deeper and for us to say, well, you know, some regulation is coming. And to give credit to some of these institutions, they have seen the writing on the wall and are already moving. But they are going to need a bit more of a nudge than that.
Right. So, I mean, what are you going to do to ensure that these industries comply? Are you talking about fines?
Oh, look, there are some much harsher penalties being proposed in the discussion document and definitely we’ll arrive at a discussion.
Can you give me any examples of that?
I don’t want to pre-empt the discussion, because we want to make sure the consultation is fair. But I think there will be harsher penalties, because I think some of the behaviour that we’ve seen in the past where the penalties may have been just cost of business kind of stuff. But also there is going to be, as proposed in the discussion document, some accountability for senior managers and directors which hasn’t been there before.
Okay. What does that accountability look like?
Well, you know, that’s up for grabs.
But what are the options? This is an options paper, what are the options?
Yeah, look, there’s obviously increased penalties for fines, greater enforcement and looking for some of the structures that those boards are going to have to look at the detail of their products and their systems, because some of the products actually don’t fit the customers and some of their systems don’t fit the customers as well. They’re all targeted at sales and maximising sales revenue. And in those instances, they will have to change their back-office systems to make sure that they prioritise customer outcomes.
And so when you say accountability for senior executives, are you talking about things like not only fines, but jail terms or criminal offences?
No. I think we’re certainly looking at fines, at increasing those fines. Those are the kinds of things that are within the discussion document. But they know we’re taking this very seriously, as the Australians are across the Tasman. A lot of these firms and a lot of these sectors work on both sides of the Tasman, so obviously, we are watching very closely at what they’re doing across the Tasman as well, and more scrutiny and accountability of directors and senior managers is what came out of the Australian Royal Commission, and that is what is within the document too.
All right. I want you to change hats now as Digital Communications Minister. Now, Jacinda Ardern is leading this call for a global compact, a global call, the Christchurch call for social media companies to take responsibility for extremist content. What’s your input been?
So we’ll be over in Paris as part of the G7 digital ministers as well. We have to seriously look, as we will in Paris, but also here in New Zealand post the 15th about how terrorist extremists are using social media, as the Prime Minister has pointed out. It is a place where they are gathering. It’s a place where they are growing and getting their messages out. And then ultimately what happened on the 15th. So we do need to make sure we crack down on that to keep all New Zealanders safe.
Great. Okay. Let’s talk about this global idea, this pledge. I mean, that’s a global pledge. How can you back it up? What’s the stick for these people?
Well, we have to take a global approach, I think, to work up against the heft of the likes of Twitter, with the likes of Facebook, because New Zealand doing it in isolation won’t be enough. And that’s why I think having the Paris meeting, having the heft of working with France, other nations, having those social media companies at the table, to say this can’t go on any more. You know, if you look at what those terrorist groups are doing and using some of the features of social media, again, to gather, to grow and to get their messages out, and that puts us all at risk.
As a government, are you acting fast enough on this? We have had the Christchurch mosque attack, but Australia has introduced legislation, fines and potential jail times for executives. Germany has fines of 50 million euros if hate speech isn’t taken down within an hour. And yet we were one of the countries that was affected.
Yes. And it’s been five or six weeks since the 15th. And in two or three weeks, our Prime Minister will stand side by side with the French President to call those social media companies to account, to make sure that they change some of the ways that their platforms operate. Now, if you’ve watched those social media platforms in the last three or four years, they seem to have snubbed their noses at any regulator who wants to do things, so we have to take this global approach in order for, as you say, the way it was used here in New Zealand on the 15th of March. But also concerns around the rest of the world about how those platforms are growing.
Are those tech companies going to turn up to this summit?
Well, as you’ve already heard, some are going to turn up. And we hope others will join as well. But we can’t sit here and do nothing after the horrible experience that we’ve had last month. And I think having the heft of someone like the President of France to help get that call out and to call some of those social media companies to account is not a bad way to deal with those problems in a global sense, but obviously there’s a lot of work going on in the meantime.
So you think doing a thing locally or just nationally, like the UK’s proposing a regulator imposing legal duty of care to these companies. I mean, are those things just pointless?
No, they’re not pointless, but I think they can be much more effective if you act globally with some other big players, and that’s what Paris is all about.
What about taking a more hands-on approach? We’ve just unfortunately had the Sri Lanka Easter Sunday bombings. Now, there they temporarily shut down social media sites after those bombings. Should we have done something like that retrospectively after March 15th?
Some of our internet service providers did shut down some sites that were propagating some of the material that happened as a result of March the 15th.
That’s the industry regulating itself; that’s not the government stepping in.
No, but I think if you look at the way the industry and the government worked in a lot of spaces, actually, in and around the 15th to make sure that New Zealanders were kept safe, it’s quite promising. You know, as of the 15th, yes, there’s more work to be done, and that’s what Paris is about, that’s what a lot of the work that’s going on behind the scenes domestically to progress some of the issues that you’re talking about, to make sure that both domestically and internationally, we can have some movement.
So can you tell me, Minister, as Digital Communications Minister, there is work being done domestically around this?
What kind of work?
It hasn’t been announced yet, but I can tell you there’s some furious work going on at the moment to make sure.
And when will we see the results of that work?
I don’t want to give you timelines on that. It won’t be too far away, but at the moment, obviously, the focus is making sure that we can work with some of these global players to get some cooperation with them to make some big changes. So again, this extreme kind of behaviour and this gathering and growing cannot happen in New Zealand.
So you don’t want to give me a timeline. Are you waiting for the global compact, the global call to be put in place, and then, you know, act domestically? Will it be this year?
We can do two things at once. The focus at the moment in the wake of the 15th is getting international partners together to hold some of these social media companies to account. That’s what Paris is about. As I say, there’s also work going on behind the scenes to make sure that domestically, we’re doing what we can, and we can have the types of options for regulation in place that we might need to have once we get an idea of what comes out of the likes of Paris.
Okay. Kris Faafoi, Consumer Minister and Digital Communications Minister, thank you very much for your time.
Transcript provided by Able. www.able.co.nz