Nine life and health insurance companies spent $34 million on non-financial incentives like trips, business support and conferences for financial advisers over a two-year period, according to the latest report from the Financial Markets Authority (FMA).
FMA’s latest Life insurance replacement business report called Conflicted remuneration in the life and health insurance industry, highlighted that soft commissions create the risk of conflicted conduct for advisers, as the incentives could influence the way they recommend or provide advice about products to their clients.
“We’re concerned that insurers are designing and offering incentives that potentially set advisers up to fail in complying with their obligations,” FMA director of regulation Liam Mason said. “All advisers have an obligation to exercise care, diligence and skill, this also means acknowledging and managing conflicts of interest.
“However, insurers themselves must acknowledge the need to promote good customer outcomes and take responsibility for conflicted conduct that results from these incentives,” he added.
The FMA said it expects insurers to consider the number and nature of soft commissions they provide to advisers, to ensure risks to customers from conflicted conduct are minimised.
“Based on the information analysed, advisers seem to be the main beneficiaries of the soft commissions provided by insurers – it is difficult to discern any direct benefit to consumers,” it said.
In the report, the FMA detailed how the sales of one insurer, who for the period stopped offering overseas trips, dropped by a third.
“This supports what the FMA found in other reviews, that soft commissions directly influence adviser behaviour,” the regulator said. “The recent FMA report into adviser conduct when replacing insurance policies found a direct connection between incentives like overseas trips and switching policies to reach volume targets.”
The report also suggests that, by value, the largest type of soft commission was insurance companies taking advisers on trips. Insurers spent $18 million on this type of incentive - 24 of these trips were international, while 5 were domestic. Destinations offered in the review period included Tahiti, China, Britain, Argentina, Japan, the United States, Singapore, Fiji, Taupo, Bay of Islands and Queenstown.
The FMA also quoted the International Monetary Fund (IMF) 2017 FSAP report, which notes the prudential risks to the life insurance sector due to the levels of commissions. FMA said its latest report shows insurers spent 9% of their revenue from new product sales in the form of soft commissions. Advisers also receive upfront commissions for selling products.
Two further reviews will examine the sales and advice and the risks of conflicted conduct. One will look at insurance replacement business practices in QFEs (large financial institutions), while another will look at the structure of bank incentives in the sale of financial products, the regulator added.