Morals Or Incentives Makes Bad Agent

Claims by insurance firm Partners Life that insurance advisers' morals, not their sales incentives, drive poor behavior have been rejected by the Financial Markets Authority (FMA).

The FMA last week released a report into insurance adviser behavior, looking at whether they were replacing their clients' policies unnecessarily, to maximize the commission they were paid.

It found half the 24 advisers it reviewed were not aware of their obligation to act with care, diligence and skill, or were in breach of it.

It said it was worried they were chasing commissions of up to 230 per cent of a policy's first year premiums and overseas trips. Many advisers failed to recognize that there was a conflict of interest, which the FMA said made it hard for them to manage it.

The FMA called for insurers to consider whether their model of "unusually high" upfront commissions was the right one, and whether there was an alternative that would be better for consumers.

Partners Life managing director Naomi Ballantyne said the vast majority of advisers took their obligations to clients seriously. But she said it was not the incentives themselves to blame.

 "By drawing a conclusion that it is commissions and incentives rather than individual morals that drives poor behaviors, while still only part of the way through their research, and given such a small number of advisers having been identified as behaving poorly, the FMA risks generating consumer distrust of the adviser distribution channel and may consequently drive those consumers to other distribution channels which have not yet been investigated in the same way, or alternatively to simply not engage in any advice process at all regarding their risk protection needs – something that would be totally counterproductive to the best interests of consumers."

She said she expected the FMA's next piece of work, into salespeople who work for big product providers, to show similar problems even though they have different remuneration models.

"Our expectation is... poor individual morals will be consistent across all channels... in other words, there will be individual people with poor morals and therefore, poor practices, across all channels."

But FMA chief executive Rob Everett said the link between incentives and advisers replacing clients' policies was clear.

He said there was no evidence the advisers looked at were taking their obligations seriously. While the 24 advisers were not a representative sample, he said the findings offered the FMA no comfort.

"Insurance providers cannot shirk responsibility for the behavior of advisers that is a direct result of the incentives designed by those same providers. We point to the data and findings in our report as clear evidence that incentives are influencing advisers' conduct.

"We have been raising these issues since 2015 and we're disappointed to see signs that the industry continues to disregard the interests of the NZ public and consumers."

Ballantyne said Partners Life agreed poor replacement advice processes could cause damage to consumers. 

"We also agree that the industry alongside the regulator must find the best methods to eliminate the opportunity for poor advice practices and behaviors to impact negatively on consumers.

"Our view has always been to firstly regulate a minimum process and a code of conduct that must be followed by any distribution channel irrespective of remuneration structure, when giving advice regarding existing policies and then to police or audit compliance with these requirements.

"The industry must also take a stronger stance on holding their individual distribution personnel, whether advisers or employees, to character and behavioral standards which reflect our commitment to putting the client's interests first. In practical terms this means being prepared to decline or terminate an agency, or an employment agreement, if evidence of poor morals is identified, and then to address and put right any negative impacts on the applicable clients."