The Financial Markets Authority today released a report into its ongoing review of conflicted conduct and insurance replacement business practices among advisers.
The regulator’s main concern regarding replacement business practices is consumers receiving the ‘short end of the stick’ due to conflicted conduct by advisers arising from commission and incentives.
The FMA stated that the distribution model of insurance policies via the adviser channel is the driver for the regulator’s concerns around this conflicted conduct.
FMA Director of Regulation, Liam Mason said, “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.”
In the report, the FMA issued warnings to four registered financial advisers for breaches of the obligation in section 33 of the Financial Advisers Act 2008 to exercise care, diligence and skill, in their provision of advice on replacement insurance policies.
The FMA noted advisers can earn significant upfront commissions – up to 230% of the first year’s premium of a “new” or replacement policy, which are high against international standards, and that there are also extra incentives such as overseas trips.
“…many of them did not even recognise that conflicts of interests can arise from incentives and commission.”
The release of today’s report follows the FMA’s 2016 review of these issues and using the data from that report it chose 24 advisers for further individual reviews.
The FMA said it based its selection of advisers on the timing of replacement policies being sold and the incentives offered by providers.
Most of the advisers are RFAs and many had never been in contact with the FMA before this review.
The report stated:
- 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.
“We used the tools available to us to respond to the conduct issues we found in the most proportionate way,” said Mason.
“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,” he said.
In addition to the four private warnings given, the FMA issued compliance letters to six RFAs and one AFA, while inquiries into three more AFAs remain ongoing.
Click here to read the full report.