Life and health insurers spend 9% of their sales revenue on soft commissions for the advisers who sell their products; FMA warns of conflicts of interest

The Financial Markets Authority (FMA) has for the second time in two months sounded the alarm bells over insurers paying financial advisers commission for selling their products.

The regulator has found that in the two years to March 2017, nine of the country’s major life and health insurers spent $34 million, or 9% of the revenue they received from new product sales, on “soft” commissions like trips, tickets to events, and gifts.

This is in addition to the monetary commissions they paid advisers. The upfront commissions advisers receive when they sign up new policyholders can be worth up to 200% of a policyholder’s annual premium.

In one soft commission case, an insurer spent $1.9 million to send 20 advisers to London for a holiday and to do some professional development. This equates to $95,000 per adviser.

The average amount insurers spent on trips was $22,000 per adviser.

Altogether insurers put 242 different soft commission offerings on the table. One offering could include tickets to an overseas conference for hundreds of advisers.

Nearly half of all these soft commissions required advisers to sell a certain number of products or products worth a certain amount of money.

The FMA, in a blistering new report, said these targets were the drivers of the poor conduct it saw.

It said insurers were “designing incentives that potentially set advisers up to fail in complying with their obligations… to exercise care, diligence and skill”.

It noted conflicted advice could leave customers over or under-insured, or see them buy a policy with exclusions for conditions they were previously covered for, or features they don’t need.

Furthermore, it said insurers may be passing on the cost of soft commissions to consumers by charging them higher premiums.  

Timing crucial

The FMA said its warnings to insurers about commissions and conflicts of interest had largely fallen on deaf ears in recent years, and it wasn’t clear whether advisers disclosing the soft commissions they received to their clients effectively managed conflicts.  

This is an important observation because requiring more advisers to disclose conflicts of interest in greater detail is one of the main ways the Government is working to improve the financial advice sector.

More disclosure, rather than a ban of commissions, is at the heart of the Financial Services Legislation Amendment Bill.

The other core part of the proposed legislation is a requirement for all advisers to put their clients’ interests first. Currently most of the advisers who sell insurance (IE Registered Financial Advisers) don’t need to do this. Nor do they need to disclose how they’re paid.  

Before introducing the Bill to Parliament in August 2017, the previous National-led Government decided that following the UK and Australia in banning or capping commissions would reduce the access the public had to advice, as they would have to pay [more] for it.

The new Labour-led Government has supported this position; the Bill passing its first reading in December, after the September 2017 election. 

Currently, it is before a select committee and the Government is consulting with the public on exactly what tougher disclosure requirements should look like.

All this is happening against a backdrop of the FMA and Reserve Bank formally asking banks and insurers to prove New Zealand doesn’t need to follow Australia and have a royal commission on financial services.

Talking to Radio New Zealand about the matter earlier this month, FMA CEO Rob Everett said: “Most of what seems to go wrong in financial services comes off the way people get paid; the way they get incentivised to sell product; to give advice.”

Findings in detail

Coming back to the report, the FMA used data from AIA, Asteron Life, AMP, Fidelity Life, nib nz, OnePath, Partners life, Southern Cross and Sovereign in its study.

It found that over the two years to March 2017, insurers spent:
- $18m on trips, including one to Queenstown where advisers were taken heli-skiing, on a wine tour and a motorsport driving course;
- $5.5m on professional development;
- $3.8m on events;
- $3.5m on “other” soft commissions like contributions to superannuation schemes or professional association membership fees;
- $1.7m on sponsorship towards things like golf tournaments and conferences;
- $1.6m on gifts, rewards and prizes;

The amount different insurers spent on soft commissions varied. While one spent only $209,000, another spent $12m (over a third of the total spend for all insurers).

Around 3,000 advisers received tickets to events and a similar number received gifts, rewards or prizes. Only 800 advisers were sent on trips, despite this being the most costly type of soft commission.

Two insurers told the FMA they no longer offered some types of soft commissions (interest.co.nz believes AMP is one of these). One of them said its decision to do so had seen its sales drop by a third.

“This suggests that soft commissions definitely have an impact on adviser behaviour, and that in some instances advisers are acting in their own interests, rather than their customer’s interests,” the FMA said.

While it found that insurers’ sales would only increase by between $1 and $8 for every $100 they spent on soft commissions, if insurers didn’t provide soft commissions this would materially decrease their sales.

So the role of soft commissions was largely to encourage loyalty among advisers.

“Advisers may be incentivised to place all, or a majority, of their new policies with a particular insurer – not due to a particular soft commission being offered at a point in time, but because of the wide range of benefits that can be obtained over the long term.”

The data also showed that insurers’ sales peaked around the sales target deadlines they set advisers.

On the upside, the FMA found there was no correlation between soft commissions and the quality of products sold.

It found that while only 42% of available products had been reviewed by independent research companies that advisers used, 81% of the products advisers sold had been reviewed. And of these reviewed products sold, three quarters received high ratings.

The FMA concluded: “At the heart of our concerns is the established distribution model for the sale of insurance policies, which includes commissions (monetary and nonmonetary)…

“Our view is that it is the responsibility of insurers to measure and manage the impact of incentives on advisers’ behaviour and consumer outcomes.”

The FMA plans to meet with insurers to “ensure they recognise our expectations”.

It will also publish the results of a study on Qualifying Financial Entity (QFE) insurance providers’ replacement business, and the structure of bank incentives in the sale of financial products.

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?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

23 Comments

It's their money they can do what they like with it!

some of it is mine

You are wrong NZdan. It's reward for corrupt dealing. Back in the nineties I had an advisor who found the need to relocate all the insurances to Fidelity. Every one of a great list of bits and pieces. And I paid this guy a fee and the insurances relocated.
For many years I observed him going to locations worldwide with Fidelity. A group of advisors, with their wives. These were not weekends in Fiji. They would be away two or three weeks. One year Italy, next Egypt, then Manhattan. No 'professional development.' Year after year.
Of course Fidelity's high regard for the agent, had no connection to his rigorous conversion of any and all polices he came across to Fidelity.

In my industry you have contractors awarding materials supply on Local Government tenders to the supplier that’ll fly their company over to the Sydney 500. Wouldn’t ratepayers like to see that saving on the job?

Name and shame. The FMA report is very light on the details.

I think we've heard about all we need to hear.

Great quote by Rob Everett about incentives, perhaps it's time to ban sales related incentives for financial service providers - for the good of everyone.

We spent a lot of money on booze, birds and fast cars. The rest we just squandered.

Typical IT GUY.. going thru my browser history again. :)

At least football is a noble pursuit and the masses were thoroughly entertained.

Circus and Bread was honourable the real Royal commission will also focus on Auckland Rugby

Then we have a major disaster and then suddenly the insurance companies go broke. Imagine if they didn't blow the money that they should have in reserve and reinsurance.

From the outset of revelations from Australian financial market royal commission, we have been told that there is a culture which is quite different here in New Zealand (refer Kris Faafoi and initial comments by banks and Adrian Orr).
Youi's sales techniques and these revelations indicate that we may not be quite so different to our cuzzie bros.
The level of such rewards do not entice selling agents to take customer interests as a concern into account.
I find it interesting that not only the FMA and NZRB are taking the banks to account, so now is the Parliamentary Select Committee. I have suspicions that all three are increasingly becoming aware of unacceptable practices and each is taking the default position to protect themselves by requiring banks and the financial services to account.
I'm not into conspiracy theories, but my bet is that much is to come out in the next few months and beyond.
However, the outcome of the Youi revelations resulted in a wet ticket slap on the hand and naive New Zealanders still lining up to buy policies from Youi.

Phew, glad that I don't have any life or health insurance....

Meanwhile the big 4 banks make (take) produced December quarter net profit after tax of $1.312 billion.
That's an annualised $5.2b after tax. But let's pick on the advisors. (Yes I am an advisor).
Interesting fact in the above article. "On the upside, the FMA found there was no correlation between soft commissions and the quality of products sold...It found that while only 42% of available products had been reviewed by independent research companies that advisers used, 81% of the products advisers sold had been reviewed. And of these reviewed products sold, three quarters received high ratings"
There are many what we call "aligned advisors" In other words an AMP advisor will sell AMP products without independent review. But non aligned advisors use research, use ratings, and put their clients with insurers and policies that give more opportunity to claim.
Further fact not mentioned. The FMA did extensive research into "churn" the practice of changing client policies just to get commission. What they found...
The FMA report highlighted 4 advisors out of approx. 3,700 who needed formal censure, a tiny percentage (0.108%) which I would respectively submit is quite exemplary and a fine example for other professions to aspire to including the law profession yet alone real estate agents.

Banks take away $5.2b which is around 2% gdp. Our growth is currently what, 4%? So the banks are holding back out gdp growth by a third.

That is a misunderstanding of GDP. Bank profits have nothing to do with GDP in the way you suggest. You would be better off pointing out that bank dividends to offshore partents increase our current account deficit, though.

Great article in www.goodreturns.co.nz regarding this: 'It’s clear the Financial Markets Authority doesn’t like soft dollar commissions at all. But it’s hard to find any hard evidence in its report produced yesterday what the problem is.'

You are kidding, right? Conflicted advice is always a problem. Even the appearance of conflicted advice is corrosive for the industry. How can any commission seller meet proper fiduciary standards of putting the interests of their client first, when the attractions for choosing one outcome over another is done when soft (or even hard) commissions/incentives are pulling choices in the background?

If you can't see the problem with such incentives/commissions, you are likely part of the problem.

No I'm not kidding, I think this 'conflicted advice' thing is blown out of proportion. If you walk into a bank your walk straight into conflicted advice territory as soon as you enter the door. The banker isn't going to show you all options available in the market.

If an 'independent adviser' is otherwise using sound research and reasons for recommending a certain insurer then the fact that they may get an offshore conference out of it is a bonus and well earned break from an otherwise tough, commission only job. Not uncommon for sales professionals to be offered overseas conferences.

Not kidding, just extremely shortsighted. Are you by chance an "independent" financial advisor?

"The banker isn't going to show you all options available in the market."
What rubbish.
When I walk into a bank for advice I am not after all options available in the market. Just what is in my best interest in terms of my goals and risk tolerance. I expect to be shown all options that suit me, not what is in the advisers interest.
Come on; even a car salesman is going to show me all the options that suit me. Reputation is important.

"Not uncommon for sales professionals to be offered overseas trips. "
Well maybe that is part of the culture that is causing concern and resulted in the issues in Australia. I aren't aware of too many jobs where performance is rewarded with $95,000 trip overseas.

Oh dear.
"When I walk into a bank for advice I am not after all options available in the market. Just what is in my best interest in terms of my goals and risk tolerance. I expect to be shown all options that suit me, not what is in the advisers interest..."
Exactly. But it won't happen.
The point is that a bank salesperson (advisor!!??) doesn't even know what those options are. They don't know that there are alternative options( to suit) that give the consumer much more chance to claim when needed, often at a lower premium. Why would they? They are incentivised to offer only the bank products and they have no training whatsoever in anyone else's product.
But here you are honestly thinking that they will in fact show you "... my best interest in terms of my goals and risk tolerance... all options that suit me..."
And that is the real problem. That NZ consumers believe that.
Yes, the soft commission offers are a bad look, but at least you get to see it. The truth is that kickbacks and such-like are endemic through NZ business and political culture but is mostly not seen.
The "average" advisor is not going on these trips. In fact the FMA report disclosed that approx one third of non aligned advisors are earning less than the minimum wage.