Commerce & Consumer Affairs Minister Kris Faafoi pledges measures to improve financial services sector conduct shortly as regulators bemoan poor life insurer conduct and culture

Commerce & Consumer Affairs Minister Kris Faafoi pledges measures to improve financial services sector conduct shortly as regulators bemoan poor life insurer conduct and culture

The Financial Markets Authority (FMA) and Reserve Bank (RBNZ) are disappointed with life insurers’ response to their conduct and culture review, and have given some of them until December to develop "mature plans" to respond and remediate their findings.

FMA CEO Rob Everett last week said the FMA was considering whether to prosecute some life insurance companies over their sales tactics. Although there was no mention of this in Tuesday's statement from the FMA and RBNZ, the regulators are clearly unhappy with much of the life insurance sector.

Everett says progress has been slow and not as far-reaching as required. Although some life insurers have started work to identify the customer and conduct issues they face, others have not provided any detail on this.

"The FMA and RBNZ will continue to monitor how the insurers are responding to recommendations and implementing their work plans. Life insurers are currently not legally required to become more customer-focused and the FMA and RBNZ found that the sector has a weak appetite for change," the regulators say.

"Deficiencies in some of the plans received, and some insurers’ lack of commitment to implementing the regulators’ recommendations, further demonstrates the need for additional obligations to be included in the regulation of conduct of life insurers."

Commerce and Consumer Affairs Minister Kris Faafoi says he shares the regulators' concerns. Faafoi says the Government is working to fast-track measures to improve conduct in the financial sector, and will announce action on this shortly.

“We know the wider financial services sector – including both banks and insurers – hasn’t been putting customer interests top of mind. Sales incentives are a big part of the problem. Incentives play a useful role in some cases and we don’t want to remove them entirely. But when insurers sell financial products and services, the focus needs to be on the customer and not just on profit," Faafoi says.

“We plan to introduce a regime where banks and insurers are primarily focused on their customers,” says Faafoi.

Financial Services Council CEO Richard Klipin says it's clear the sector needs to do more and do it faster to improve identified issues. Klipin says the Financial Services Council, which represents investment and life insurance companies, is "committed to building a sector that has good customer outcomes at its centre." 

New issues identified

Sixteen life insurers were asked to provide work plans outlining the steps they will take to improve existing processes and address FMA and RBNZ findings and recommendations. Insurers who completed the exercise identified at least 75,000 customer issues requiring remediation, with a value of at least $1.4 million.

The FMA and RBNZ say some of the new issues identified included:

·Overcharging of premiums and benefits not being updated due to system errors, human errors and under-reporting of deaths;
·Poor customer conversations overlooking eligibility criteria and poor post-sale communications, which lead to declined claims and underpayment of benefits. And;
·Poor value products were identified, where premiums charged were not fair value for the cover provided.

The FMA and RBNZ say they have committed to report back on staff incentives and commissions for intermediaries. Previously the regulators have raised concerns with conflicted conduct associated with high up-front commissions and other forms of incentives such as overseas trips paid to advisers.

"Although some insurers have committed to removing sales incentives for employees and their managers, not all committed to removing or altering indirect sales incentives," the regulators say.

In January the FMA and RBNZ revealed their findings from a major conduct and culture review, giving life insurers five months to show they’re removing incentives for sales staff. However, the regulators stopped short of explicitly telling life insurers, who collect in $2.57 billion in premiums a year, to stop paying commission to the intermediaries that sell their products.

The probe into life insurers' conduct and culture followed one into New Zealand banks in the wake of Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Here's the FMA & RBNZ's full statement.

FMA and RBNZ disappointed with insurers’ response to conduct and culture review

The Reserve Bank of New Zealand (RBNZ) and Financial Markets Authority (FMA) today released their findings on life insurers’ responses to the joint Conduct and Culture Review.

Overall, the regulators were disappointed by the responses. Significant work is still needed to address the issues of weak governance and ineffective management of conduct risk identified in the regulators’ report earlier this year.

Rob Everett, FMA Chief Executive, said: “While we’re disappointed, we’re not surprised as the responses confirm what we found in our original review. It’s clear that progress has been slow and not as far-reaching as required. Some providers have started work to identify the customer and conduct issues they face, others have not provided any detail on this.”

Sixteen life insurers were asked to provide work plans outlining the steps they will take to improve their existing processes and address the regulators’ findings and recommendations.

There was wide variance in the comprehensiveness and maturity of the plans provided.

Adrian Orr, Reserve Bank Governor, said: “We’re disappointed the industry’s response has been underwhelming. The sector has failed to demonstrate the necessary urgency and prioritisation, around investment in systems, to provide effective governance and monitoring of conduct risk.”

There was also a wide variance in the quality and depth of the systematic review of policyholders and products. Some did not complete this exercise and others did not provide data on the number of policyholders affected or the estimated cost of remediation activities. Insurers that completed the exercise identified at least 75,000 customer issues requiring remediation, with a value of at least $1.4 million. Some of the new issues identified included:

·Overcharging of premiums and benefits not being updated due to system errors, human errors and under-reporting of deaths

·Poor customer conversations overlooking eligibility criteria and poor post-sale communications, which lead to declined claims and underpayment of benefits

·Poor value products were identified, where premiums charged were not fair value for the cover provided.

Sales incentives and commissions

The FMA and RBNZ committed to report back on staff incentives and commissions for intermediaries. Previous reports by the FMA reflected the concerns with conflicted conduct associated with high up-front commissions and other forms of incentives, (like overseas trips) paid to advisers.

Although some insurers have committed to removing sales incentives for employees and their managers, not all committed to removing or altering indirect sales incentives.

Those providers that have removed sales incentives for employees don’t typically use external advisers to distribute products. Providers using external advisers told the regulators that changing long-held business arrangements and distribution models is difficult and will take time to implement.

Mr Everett said: “We’re ready to work with life insurers to ensure they prioritise their focus on serving the needs of their customers, while at the same time balancing the need to remunerate advisers for the important work they do to help these customers. But we do not think high up-front commissions create confidence that insurers and advisers are acting in the best interests of customers.”

Mr Orr said: “Good governance within insurance firms requires the effective management of conflicts of interest. We need to see much better systems and controls in place to manage the inherent conflicts where advisers or sales staff are offered incentives to sell or replace insurance policies.”

Next steps

Those companies that have not undertaken comprehensive systematic reviews of policyholders and products have been asked to complete further reviews of their systems to identify issues, and to develop mature plans to respond and remediate any of their findings. These plans must be completed by December 2019.

The FMA and RBNZ will continue to monitor how the insurers are responding to recommendations and implementing their work plans. Life insurers are currently not legally required to become more customer-focused and the FMA and RBNZ found that the sector has a weak appetite for change.

Deficiencies in some of the plans received, and some insurers’ lack of commitment to implementing the regulators’ recommendations, further demonstrates the need for additional obligations to be included in the regulation of conduct of life insurers.

Here's Faafoi's statement.

Consumers deserve better from life insurers

The Minister of Commerce and Consumer Affairs says a number of life insurers still need to lift their game after an underwhelming response to the RBNZ and FMA conduct and culture review.

Earlier this year, the review highlighted a culture that prioritises sales over customer interests. The FMA and RBNZ then asked 16 life insurers to provide work plans that would demonstrate the steps they would take to improve processes, governance and monitoring of conduct risk.

“Disappointingly, in many cases the responses from some life insurers show slow and inadequate progress, and I share the regulators’ concern,” Kris Faafoi said.

”Many of the plans life insurers provided to the RBNZ and FMA for improving their internal systems were poorly expressed and incomplete.

“Some life insurance companies also appeared to be trying to ‘pass the buck’ to the brokers and advisors they use to sell their products.

“I do acknowledge that some life insurers have made commitments to address issues, and are moving in the right direction. However, overall the industry still has work to do.

“I want insurance providers to understand that they remain responsible for the quality and appropriate design of the products they sell, whether directly or through contracted agents, to ensure those policies fit customers’ needs,” Kris Faafoi said.

Mr Faafoi added that the Government had been working to fast-track measures to improve conduct in the financial sector, and will announce action on this shortly.

“We know the wider financial services sector – including both banks and insurers – hasn’t been putting customer interests top of mind. Sales incentives are a big part of the problem. Incentives play a useful role in some cases and we don’t want to remove them entirely. But when insurers sell financial products and services, the focus needs to be on the customer and not just on profit. 

“We plan to introduce a regime where banks and insurers are primarily focused on their customers.

“I thank the RBNZ and FMA for their continued efforts to ensure there is improvement in conduct and culture right across the life insurance industry,” Minister Faafoi said.

And here's the Financial Services Council's response

Financial Services Council comment on FMA & RBNZ Review

The Financial Services Council acknowledges the release of the Financial Markets Authority (FMA) and Reserve Bank (RBNZ) review into the response of life insurers’ to the Conduct and Culture Review process, and the strong message that faster progress is needed.

“It is clear that as a sector we need to do more and do it  faster to improve identified issues especially in relation to legacy products, customer communications, and product design”, said Richard Klipin, CEO of the Financial Services Council.

“Conduct, culture and ensuring great consumer outcomes is paramount.  Improvements across the sector remain a work in progress and this latest review from the FMA and RBNZ demonstrates that.

“Individual members will now work through their specific issues raised by the FMA and respond appropriately with steps to rectify them.

“ It is important to note that there is a lot of work going on across the sector in addition to the regulator processes to improve culture and conduct. This includes the development of an FSC code of conduct, ending overseas conferences and other  soft commissions, and strongly supporting the progression of the Financial Services Legislation Amendment Act.

“Good progress has been made in recent months but we need to continue to work with urgency and focus to build the trust of stakeholders and to ensure we are serving New Zealanders in a fair and transparent way.

“We expect strong scrutiny  on us as an industry  until we get this right and I’d like to thank the FMA and the RBNZ  for their work on this report.

“We are committed to building  a sector that has good customer outcomes at its centre and look forward to continued engagement  with regulators and Government on this”,  concluded Klipin.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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14 Comments

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Highlight new comments in the last hr(s).

I love how burried at the end is the lovely quote "Life insurers are currently not legally required to become more customer-focused and the FMA and RBNZ found that the sector has a weak appetite for change."

So the life insurers could tell the FMA and RBNZ to take a hike. This must be why they had a temper tantrum last week; life insurers called their bluff whereas the banks didn't. If, and that's a big if, they get that power then the FMA and the RBNZ should actually engage with the market with respect and not expecting submission and subservience.

More cotton wool and duct tape!
For duct tape to adhere for a longer term the applicator needs to be skilled in surface preparation, application and then delivery of the product.
If this Col was a trade / service firm with a review section on FB / Google you would be a fool to use them.

Just more fuzzy warm rhetoric.. nothing of substance which sums up all of the CoL.

He may as well have come out and suggested introducing "Well being legislation" to confirm its all hot air.

What, if anything, would you have him do Andy?

Stop coming out with new ideas when their is a back log of 'projects' that have been failed to be implemented.
Concentrate on the basics of getting a few things running before moving on.

Fafoi really does need to let the watchdog off the leash and make the changes that obviously need to happen. I am disappointed in the lax approach to loansharks and shopping trucks as well...

Unleash to do what exactly?

You can guarantee some bully tactics coming from this offshore owned profiteering cartel, who know no different.

Time the Superfund stepped into this place. Just like they have with Kiwibank. This industry is short on competition, strong on profits that get shipped offshore, but fair weather sailors in a storm.

Who ever idea it was to sell NZ owned banks and insurance companies must have been working for overseas interests. Do you here me Roger!!!

Brave words, unfortunately being brave doesn't suit a country which has borrowed money (hard money) almost year on year for decades.

The system has been gamed by the banksters mate.

The reserve bank, under the instructions of government, should and could have capped the income to debt ratio on loans to say 5 times gross earnings. It was never going to happen under Jonkey. His current position should give this away. Aid and abated increased investment for his mates, at the expense of the country.

NZ inc cant revisit the income to debt ratio now; which stands at 9 times earnings, as it would collapse the housing market, which would likely expose deposit holders to undue risk as a result of the open banking resolution that Jonkey introduced as well. He was nothing more than a snake oil salesman!!, who hoodwinked a lot of voters who are too afraid to admit it.

It's now the government's responsibility to make sure businesses are customer focused???

Apparently yes, as even the Aussies found out, in relation to their banks.
Capitalism had been good for all these financial and insurance products vendors, but not for the consumers and customers. Governments have no backbone to tackle the behemoths. Instead they let them become TBTF.

Faafoi is actually a really nice bloke , hard working , rational , sensible , has kept his nose clean ..........and is full of good intentions ........... but the expressway to purgatory is paved with the same material .

He should look up the word altruism and then understand this is what Banks are NOT

We live in a Capitalist world , profit comes first ...... there is no other reason to risk going into business , so we need to allow Banks and Insurers to make a profit ...........

We tax them for the benefit of out people , that's our slice of the cake , so we should accept that as a fair shake

1990 that did it. The BNZ bailout changed the landscape forever. Up until the Lange/Douglas government all the trading banks had been tightly reined in by the RBNZ. Primary and Industry sectors got financing, not much else. No personal lending. People existed on lay by or HP. No home mortgages. That was for building societies, savings banks and solicitors. The RB control was coined as “the corset.” When it came off, well it became apparent that the trading banks didn’t really know how to lend. Words such as collateral were not in anyone’s dictionary. Havoc, sheer havoc in the mad house to lend, and many, very many in fact, “entrepreneurs” made hay while the sun shone. The BNZ was the first domino and the whole sector collapsed onto to the road leading to where we are now, didn’t it. As they used to say, all roads lead to Rome.