Industry Responds to FMA Report on Replacement Business Issues


Various industry stakeholders have responded to the Financial Markets Authority’s investigation into conflicted conduct among life insurance advisers (see: FMA Cracks Down…).

The Financial Services Council welcomed the report and Financial Advice New Zealand has applauded the FMA’s decision to extend their inquiries to a broader review of replacement business practices including a review of QFE sales practices.

Shining a light

Financial Services Council CEO, Richard Klipin

The FSC said the report was a ‘useful spotlight’ in bringing attention to behaviour in some parts of the industry.

“We welcome the report for shining a light on conduct, disclosure and incentives. There’s no avoiding the fact that the findings are not great and that in some areas the industry needs to do better”, said FSC CEO, Richard Klipin.

“It’s important to note though that the fundamentals of the industry are sound, and that the  small sample of advisers  that this report is based on may not be  indicative of the thousands of financial advisers who every day do great work for their clients  improving their financial outcomes,” he added.

Key findings in the report were made from a sample of 24 advisers selected for further individual reviews based on data from its 2016 review.

Financial Advice New Zealand stated that, “Unfortunately, it is this type of practice by the minority which tarnishes the reputation of the industry for the majority of advisers who are focussed on their clients’ best interest.”

The new body highlighted three key issues as a result of the report that need further attention:

  • The role of all industry participants (advisers, providers and groups) in identifying and managing conflicts of interest;
  • Development of standards and processes for managing such conflicts;
  • The lack of understanding by many of the advisers identified in the report as to their legislative obligations.

Fidelity Life CEO, Nadine Tereora said the insurer is taking the FMA report “…extremely seriously” but reminded that from their experience most advisers have their customers’ interests firmly as first priority.

“Fidelity Life expects the independent financial advisers who advise on our life insurance products to always put their customers’ interests first – this includes disclosing remuneration and incentives in accordance with legislation,” Tereora said.

“In remunerating financial advisers, we need to strike a balance between ensuring more Kiwis have ready access to advice and insurance protection, and ensuring New Zealand has a thriving community of independent financial advice businesses,” she added.

Kepa CEO, Jeff Page told RiskinfoNZ, “I believe this is the first real sign of FMA signalling to the market that big changes are happening when it comes to commissions and soft dollar incentives.

“This is what happened in the UK and Australia,” he noted.

AIA New Zealand Executive General Manager, Graeme Edwards told RiskinfoNZ that the insurer is concerned by the report’s findings but pointed out the importance of keeping it in context, due to the small sample of advisers investigated.

“AIA’s position has always been that any behaviour that is not in the interests of the consumer should be exposed and dealt with,” he said, but stressed the importance of the adviser’s role.

“Advisers have a vital role in ensuring that progress is made towards closing New Zealand’s acknowledged underinsurance problem. Research has found that people have trouble identifying which insurance products might suit them, and difficulty in understanding their level of risk,” he said.

Soft dollar incentives

David Whyte, who co-founded insurance information site Life-Info with veteran adviser Brian Klee, wrote in an article on his website that “the report will be welcomed by all right-thinking Financial Advisers who wish to see churning eliminated”.

He urged caution on the report’s criticism of commission structures, explaining it is the behaviour that can create the conflict of interest rather than the commission itself.

He also wrote if the regulator is aiming for the industry to “step up”, then soft dollar offerings are “fair game”.

“Most advisers treat these affairs as a reward, but there are also those who, as the FMA report confirms, place business to qualify for an invite,” he said.

“I appreciate that recommending a ban on these incentives will draw the ire of some advisers, but the whole idea of these trips demeans the status of the Financial Adviser and dilutes the integrity of independent financial advice.”

Most advisers treat these affairs as a reward, but there are also those who, as the FMA report confirms, place business to qualify for an invite

Speaking with RiskinfoNZ, Klee was in agreement that soft dollar offerings have no place in the industry. “If this report does nothing more than to get rid of those or certainly open disclosure if they do remain, I think the industry itself would be happy to see it go and the FMA’s quite rightly pointed that out.

The FMA report stated that, “The industry – especially insurance providers – must take more care and responsibility for the outcomes and conduct that are driven by their sales incentives.”

Partners Life Managing Director, Naomi Ballantyne said although she shares the FMA’s view that poor replacement advice can be damaging to the consumer, she raised concern on unintended consequences of the report’s conclusions.

“By drawing a conclusion that it is commissions and incentives rather than individual morals that drives poor behaviours, while still only part of the way through their research, and given such a small number of advisers having been identified as behaving poorly, the FMA risks generating consumer distrust of the adviser distribution channel and may consequently drive those consumers to other distribution channels which have not yet been investigated in the same way,” she said.

“Or alternatively to simply not engage in any advice process at all regarding their risk protection needs – something that would be totally counterproductive to the best interests of consumers.

“The industry must also take a stronger stance on holding their individual distribution personnel, whether advisers or employees, to character and behavioural standards which reflect our commitment to putting the client’s interests first,” she added.

In the coming months, Financial Advice New Zealand stated it will be looking to work with regulators, product providers and groups to explore options to address the issues raised by the FMA’s report.