Will Australia's crack-down on commissions paid to financial advisers cross the Ditch to NZ?

The writing could be on the wall for financial advisers in New Zealand… Their days of earning a living by receiving commissions from life insurance companies look to be numbered.

The Australian government has ratified a proposal from the life insurance industry to toughen the rules around commissions.

Australia’s Association of Financial Advisers, Financial Planning Association and Financial Services Council proposed the reforms.

Given a number of the life insurance providers operating in New Zealand are Australian, the question is, will they be prepared to accept similar reforms here as the Financial Advisers Act 2008 and the Financial Service Providers Act 2008 are reviewed?

The industry and the public have until July 22 to make submissions on an issues paper, released by the Ministry of Business, Innovation and Employment, that floats the idea of restricting or altogether banning commissions in New Zealand.

What’s happening in Australia?

Australia’s Assistant Treasurer Josh Frydenberg last Thursday announced upfront commissions will be capped at 60% of a policy’s premium from July 2018, and there’ll be a cap on trailing commissions at 20% from January 2016.

There’ll also be a ban on volume-based commissions from July next year, and the development of a code of conduct.

Under the transition arrangements, upfront commission will fall to 80% in 2016, 70% in 2017 and 60% in 2018.

The move comes after an Australian Securities and Investments Commission report published in October last year painted a grim picture of the influence commissions have over the quality of the advice provided to life insurance customers.

There’s also been a lot of concern expressed around ‘churn’ – the practice of financial advisers moving their clients’ policies from one insurer to another to receive more upfront commissions.

Tony Boyd from the Australian Financial Review reports, “While the package of reforms put forward by the industry does not go as far as those put forward by John Trowbridge in an independent report published in February, it will go a long way toward removing the incentives for poor quality advice.

“Upfront commissions on retail life insurance have been as high as 120%. There is usually a further 20% trail commission.

“…It is estimated these reforms will slash about $225 million in commission revenue per year by 2018.”

What are the Aussie companies that operate in NZ saying?

AMP says, “We believe this is positive for AMP as it will likely reduce industry churn, improve new business value and benefit AMP-backed planners relative to independent advisers.

AMP says it’s ahead of the game, having announced in April that it’ll slash upfront commissions on life insurance to 80% of the first year’s premium, from today.

Outgoing Suncorp Life chief executive, Geoff Summerhayes says, “The industry has known change is imminent and this announcement provides much needed certainty about a way forward.

“Adviser remuneration has been a hotly debated topic and consumed much of the attention. I recognise that advisers may experience some difficulty in adjusting, but I believe the long-term benefits will make the change worthwhile.”

Summerhayes announced his resignation from CEO on Monday, after seven years in the job.

ANZ’s deputy managing director of Global Wealth, Gavin Pearce, says, “We’re pleased to see acceptance across the industry that the insurance and advice sectors need to change in order to rebuild trust and fulfill the important objective of ensuring Australian’s are properly protected.

“Many Australians still remain unaware of their protection needs or the implications of being under-protected, so maintaining and supporting a sustainable insurance advice industry is critical.”

'Australia & New Zealand are different'

When asked whether ANZ believes the Financial Advisers Act in New Zealand should be reformed in such a way to provide similar outcomes as in Australia, ANZ’s New Zealand Wealth communications manager pointed out the regulatory environment for financial advice in Australia and New Zealand are different.

Louise Nicholson says, “Here in New Zealand, we are preparing a formal submission to the Government’s review of the Financial Advisers Act. We don’t want to pre-empt this process.

“Any change to the legislation needs to build New Zealanders’ trust in the financial advice industry and ensure New Zealanders can continue to gain access to quality financial advisers.”

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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6 Comments

It's important to recognise I think that AMP is not strong in the independent adviser market and (according to independent research houses) do not have market leading products. They essentially own their own distribution arm - so it's in their best interests to reduce upfront commissions - but what is in the best interest of the NZ consumer? hmmmmm?

Putting a limit on the trail commission is stupid if they want to stop 'churn' if you are getting a high trail and a low up front that will stop churn in its tracks.

Of course all the insurance companies want to stop churn away from them it's never churn when the business is coming over to them.

I have difficulty understanding how "insurance salespeople" get to be labelled "financial advisers"

A slow read through the article above clearly shows a disproportionate influence of the Insurance Industry

Great example here - a client - on the advice of his adviser took out a "death cover" insurance policy with Westpac Bank. At some later stage he developed life threatening cancer. His Financial Adviser churned him over into a policy with CBA (Commonwealth Bank) because it had better commissions, but didn't have better benefits. The client died. CBA refused the death claim because he already had the cancer at the time his adviser switched the policy to CBA. And that was "financial advice" ??

http://riskinfo.com.au/news/2014/05/06/cba-in-spotlight-over-churn-case/

This may help

NZ: FSPR (Financial Service Provider Register) run by the FMA
The NZ FMA says: Registration on the FSPR is not a licensing process, it is simply an administrative registration process, it is not an official stamp of approval. Because a company is registered on the FSPR it does not mean it is licensed or regulated by the FMA or any other government agency

AU: AFSL is a licensing regime. AFSL (Australian Financial Services License) is administered by ASIC (Australian Securities Investment Commission)

Financial Advisers
There are 45,000 "financial advisers" in Australia of whom less than 1,000 hold full AFSL licenses.
The remainder are registered representatives of licensed holders. Many of the licenses are restricted.

Licensing
the distinction between "planners" and "advisors"

Providing financial advice in Australia requires an AFSL (Australian Financial Services License) which is administered by ASIC (Australian Securities Investment Commission). According to ASIC, as at August 2009, there are 4600 licenses on issue, many of which are restricted. According to Jo-Anne Bloch, CEO of the FPA (Financial Planning Association) there are 900 fully licensed Financial Planners in Australia with unrestricted licenses. A license holder can appoint an employee as a "registered representative". There are 45,000 registered representatives who are classified as "financial advisers". This creates a distinction between Financial Planners and Financial Advisers.

How would you find one of the 900 unrestricted fully licensed operatives?

NZ initial commissions are much higher than Oz - 200-230% is common here. That level of incentive distorts the "advice" offered. It is also common practice for top advisors to be flown with their families all expenses paid to Europe or the US. It's about time this group got busted.

Dude, try being an insurance adviser for two years...it's not all plain sailing and junkets I can assure you. Every upfront commission comes with a claw back period - so if the client cancels within six months - 100% commission claw back - reducing to zero at the two year mark. Constant rejection, NZ's she'll be right attitude towards insurance, competition, misinformation etc etc...But we carry on as we pride ourselves on giving great advice and being their for our clients when they really need us...