The Financial Services Council (FSC) has welcomed the FMA’s report on remuneration structures, and says a clear message has been sent to the health and life insurance sector regarding transparency, disclosure and appropriate practice.
This comes following the FMA’s report that insurers have spent $34m on non-financial incentives including trips, business support and conferences for advisers over a two-year period.
“We’ve welcomed the report because it shines a light on the remuneration practices in the sector,” FSC CEO Richard Klipin told Insurance Business. “Consumers have a right to know that the advice they’re being given is in their best interests, and if there are any conflicts involved, that those conflicts are being disclosed.”
“The way in which remuneration practices have evolved have been appropriate for the sector at certain points in time,” Klipin said. “But the FMA is clearly stating that they want the industry to assess, review and reconsider as to whether these practices are still appropriate today. It’s a very clear message, and the industry is dealing with it as we speak.”
Klipin said the main question for the industry now is how these conflicts are going to be managed. Remuneration is part of a competitive landscape, and there are many different providers who work with different distribution models, only some of which utilise soft incentives. According to Klipin, there are a broad range of responses that the industry could potentially come out with.
“When you have conflicts in any sphere of life, and certainly in business, you have three options,” he said. “First you acknowledge them, and then you’ve got to figure out if you’re going to manage them, disclose them or ban them. The industry must now decide the right approach to take.”
According to FMA director of regulation Liam Mason, the upcoming reforms to financial adviser laws will result in insurers taking greater responsibility when it comes to offering incentives.
“These laws are very complicated at the moment, but they’re going to be replaced with consistent product standards,” Mason said. “This will include the obligation that all financial advisers should put their client’s interest first in any situation of conflict. The very high incentives that we’re seeing are probably going to untenable once that becomes a legal obligation on advisers; if you skew the incentives so greatly, the conflict can be simply impossible to manage.”
“Insurers need to take responsibility when they design these incentives, so that they don’t set up advisers to fail,” Mason said. “Our message to the industry is that you’ve got a short window of time to show that you’re going to try to improve on your own. Otherwise, it’s going to come back to you.”