Bruce Cortesi and Darrin Franks, who previously published a new remuneration concept paper (see: New Adviser Remuneration Model Discussion Paper Released…) have voiced their concerns on the possibility of a commission cap for insurance advisers.
This follows the Government’s release of an options paper for its Conduct of Financial Institutions review, which revealed they are considering the possibility of capping upfront and/or trail commissions for intermediaries of insurers (see: Government Considers Capping Commissions…).
Cortesi said he is extremely concerned that a cap would make it difficult for financial advisers in the insurance space to compete effectively in the market place.
“If the rationale to cap life insurance commission is to reduce the small percentage of overall life insurance policies sold that are replaced without a fit for purpose process representing a professional code of conduct, then this is flawed and will fail from the outset. It will not change that undesirable behaviour,” said Cortesi.
He added: “If the rationale is to ease premium pressure for consumers, then this is also equally flawed in that it may well cause some to leave the profession and reduce capacity for advice to consumers. This would have the opposite effect and may well increase costs to the consumer.
“Commission is not income – it is revenue.”
“Many adviser businesses employ staff and have a number of overheads that the current revenue levels sustain. It therefore follows that there would be further ramifications for those companies and the ability to maintain current expected levels of service and meet the additional costs associated under the new FSLAB environment,” he said.
Franks noted that although such a system already has existed in the lending space for a long time, there are complexities in insurance advice that mean such a capping would mean dealing with certain consumers circumstances are unsustainable for the adviser.
“Does this run the risk of removing access to advice as an unintended consequence when the complexities may suggest it is these very consumers who are in real need of advice?” he questioned.
“It is still not clear what the problem is that the policy makers are trying to solve. Conflict of interest has been the excuse used to focus on an industries remuneration without any empirical evidence of consumer harm. Conflicts exist everywhere but the key to managing them is to ensure appropriate disclosure and monitoring and acting on behaviour. This opportunity has existed for the insurers, the regulator and professional bodies for as long as the industry has been around,” he continued.
“It feels like the assumption is that rates of commission are the profit rates of advisers when the average earnings per adviser sits at about $70,000 to $80,000. Once again, by cutting or now capping commissions and therefore reducing the Deferred Acquisition Costs for insurers, the assumption of the policy makers seems to be that the insurers will pass that saving onto consumers by way of reduced premium. Without regulating that they do so, it would appear very naïve.”
Fidelity Life CEO, Nadine Tereora, also commented on commissions and their responses to the options papers.
“We’re preparing our response to the FMA/RBNZ report and are also considering MBIE’s insurance contract law and financial institutions’ conduct options papers. We plan to make submissions on both options papers and are still working through what the various options could mean for customers, advisers and insurers,” said Tereora.
She said they do expect significant industry-wide change as a result of these reforms and that the issue of commissions is a complex one.
“It will be important to strike a balance between delivering good outcomes for customers whilst ensuring advisers are remunerated for their work in providing tailored advice. New Zealand needs a thriving financial advice community if we’re to improve the country’s under-insurance problem,” she said.
“In areas such as adviser oversight, incentives and remuneration, life insurers are being asked to reconsider the effectiveness of their current operating models in delivering good customer outcomes. We continue to discuss these issues collaboratively with our adviser partners, as we’ve always done.”