The Financial Markets Authority (FMA) has issued warnings to four registered financial advisers in relation to providing advice on replacement insurance policies, for breaches of the obligation in section 33 of the Financial Advisers Act 2008 to exercise care, diligence and skill.
The warnings are contained in an FMA report into its ongoing review of conflicted conduct and insurance replacement business practices among financial advisers.
The FMA’s primary concerns about replacement business practices are the poor outcomes for customers that can be driven by conflicted conduct. Advisers can earn significant upfront commissions – up to 230% of the first year’s premium of a “new” or replacement policy – and other additional incentives such as qualifying for overseas trips.
This report follows the FMA’s 2016 review of these issues: Replacing life insurance - who benefits?
The FMA selected 24 advisers for further individual reviews using the data from the 2016 review, based on the timing of replacement policies being sold and the incentives offered by providers.
These incentives are the drivers of the poor conduct described in the report.
The key findings:
- Half of the advisers reviewed were either not aware of the obligation, under section 33 of the Financial Advisers Act 2008, to exercise care, diligence and skill, or they were in breach of that obligation.
- Record-keeping is part of these requirements. Records of advice are essential to help clients make informed decisions and be able to understand the advice they are getting. The FMA found that advisers in this review were poor at keeping records for the benefit of clients.
- Most of the advisers reviewed and interviewed failed to recognise that incentives create a conflict with the interests of their clients.
- The industry – especially insurance providers – must take more care and responsibility for the outcomes and conduct that are driven by their sales incentives.
The distribution model of insurance policies through advisers is the driver for the FMA’s concerns around conflicted conduct in this report. The structure of this business model is based on the payment of commissions and incentives by providers to the advisers who sell their products. The upfront commissions that New Zealand providers are paying are high by international standards.
Liam Mason, FMA Director of Regulation said, “The failure to exercise care, diligence and skill for their clients was a consistent finding in our review of 24 advisers. Among the 24 advisers who were subjects of this round of inquiries, it was both striking and concerning that many of them did not even recognise that conflicts of interests can arise from incentives and commission.”
The majority of these advisers were RFAs, and this was the first time many of them had been in contact with the FMA. We used the tools available to us to respond to the conduct issues we found in the most proportionate way. While the focus of our inquiries was the conduct of financial advisers, we have also been reviewing the practices of providers and qualifying financial entities that produce and sell insurance products.”