The FMA report on soft commissions has been released, and you can find the press release and links to where you can download the full report here.
Some initial reflections on the report.
- It is a good review of the range of soft commissions in the market - in scope and detail - although even the well-informed may be surprised at some details. I was unaware of an incentive trip that cost a whopping $95,000 per adviser, coming to a total of $1.9million for that incentive alone.
- The release is timely, underlining the areas covered in MBIE's consultation on disclosure
- It is not entirely fair to contrast the expense of soft commissions with new business revenue alone - as most soft commission schemes have a business quality or persistence component, they rely on both existing business being sustained (dis-incentivising replacement business) as well as new business being produced (possibly incentivising replacement business). For contrast, the $34 million in two years was 9% of about $377million in new business revenue, but as a percentage of all revenue, it might have been only about 1%, or even less.
- It reminds me of some of the work done on sales incentives by the FCA in the UK - their view was that sales incentives could be offered, but that it should be demonstrated that they were not going to undermine client outcomes. Some methods for thinking about that were discussed, it is worth considering such rules and guidelines.
- The review looked strongly at how the incentives could affect client outcomes negatively, but did not touch on how they affect client outcomes positively or support a functioning market. Which the FMA may presume is a job for someone else. A well-designed incentive programme can do those things by providing an incentive to reach new people, to undertake more activity than would otherwise have happened, and to introduce new skills and capabilities to the market.
- I note that the FMA found that advisers did not appear to be selling particularly high volumes of product that did not rate well, and that the FMA also underlined that this did not mean that the adviser was not subject to a conflict of interest. This is true, because the conflict is not just between different product alternatives, but between taking an action which could generate a commission (either to insure or replace) or not taking an action, which would result in no commission.
- Thinking about the future reports coming: I am slightly concerned at the separation of the market into regulatory segments (RFA and AFA) as distinct from the QFE area. Consumers don't operate with such distinctions in view, they compare brand, service, products, and premiums across the whole market, and insights might be missed by considering these as discreet areas.
- It is nice to see that based on research advisers are not necessarily recommending poorer product because of conflicted incentives. However it appeared that the research reviews seemed to rate very few products as poor (only 17%) - but this is partly a results caused by the split by regulatory type, as presumably it ignores simpler, direct sales, products.
- The comment that these incentives did not appear to affect sales was somewhat at odds with the comment that one insurer lost a third of its new business when they ceased to offer the incentives. It looks like that question is still subject to conflicting answers.