Deloitte's report on the New Zealand life insurance sector provides a comprehensive overview of the structural differences between the New Zealand environment and the markets with which it is often compared. It provides context for the comparisons that are inevitably made as part of the debate over issues such as efficiency, commission payments, claims ratios, and channel mix. Rather than give quantitative answers to challenges - such as concerns about the level of commissions - it seeks first to explain the situation. Some assertions are made, usually about the possible causes of some features of the market, but refreshingly, without advocating for any particular prescription. Except for one: the report suggests caution. I think that is wise. Dramatic changes have been made to the Australian life insurance sector. It appears to be much the worse for them. In a sector where contracts are commitments for decades of cover, often with fixed terms, and sometimes with fixed premiums, it seems wise to exercise caution. Anyone writing a background paper for a strategy session would do well to set this as background reading or use the issues as a checklist for their decision-screens. What solutions you may bring to each of the issues, that will be up to you. Link: https://www2.deloitte.com/nz/en/pages/financial-services/articles/deloitte-issues-paper-life-insurance-sector.html#
With the publication of new disclosure regulations, each transitionally licensed Financial Advice Provider must now develop a process for implementing these to take effect from 15 March 2020.
This change means engaging with systems people, reviewing websites, reviewing statements of services, and reviewing statements of advice. Outlined below is a more detailed process for designing and implementing a new disclosure procedure. It is significant.
The core work involves:
- Identification, review and development of the disclosure content required:
- To be publicly available on the Financial Advice Provider website, and
- To be delivered to consumers
- When the nature and scope of advice is known
- When advice is given
- When a complaint is received
- Determining how the required disclosure is to be given to a consumer (verbally or in writing, while noting that a consumer can always request written disclosure)
- Development of an implementation plan to ensure introduction of the disclosure changes as and when required (15 March 2020)
- Development of a compliance and compliance assurance plan to provide comfort to the Financial Adviser Provider Governance Structure (e.g. Board) that the legal disclosure requirements are being met, or, in the event of a failure, any such instances of failure are identified and remedied.
The regulations also contain further information on other matters that should be considered, such as:
- The requirement to consider materiality when considering what should be disclosed
- When information must be given about a person as well as about the Financial Advice Provider
- When reference to publicly available information will be sufficient to fulfill the disclosure requirement, rather than having to specifically provide a disclosure direct
- When reliance can be given to past disclosures already completed until or unless a material change occurs
If you would like to discuss how Chatswood Consulting Ltd may be able to support you during this change, please call.
One of the most commonly asked questions about the disclosure regulations was whether or not dollar disclosure of commission would be required. There was some obvious concern on the part of some advisers. On the other hand, a small number have been disclosing dollar commissions for a while, and for them the changes are procedural and technical, rather than fundamental.
There are several dimensions to this decision. The first focus should, as always, be the customer. Principles in the current Code of Conduct under standards one, two, and four, all lean heavily on commission disclosure. Clearly, this was an area considered to be of such importance that detailed regulation is required. Let’s look at the regulations next:
In the regulations, disclosure of commissions is required when the commission is such that “a reasonable client would expect (the commission) to, or to be likely to, materially influence the advice given by A (the adviser).”
Words in brackets above are my additions to the actual regulation extract in quotes, to improve clarity.
Then, detailed disclosure in relation to commissions must be given in two circumstances:
- when nature and scope of advice known
- when advice is given, to the extent that the disclosure has not already been completed under the previous step
The specific commission disclosure required in the regulation is stated to be
- “its amount or value (or how that would be determined)”
This implies that disclosure of the amount or value of commissions are not necessarily required to be completed, provided a clear explanation can be provided as to how the commission will be determined.
Some examples follow:
- When nature and scope of advice is known, disclosure is completed that commission will be payable on completion of the contract at the rate of x% of the first year’s premium (i.e. how it is determined), or a commission amount of $xxx (i.e. the amount or value of the commission)
- When advice is given, no further disclosure is required in the event that the disclosure already given remains unchanged
- When nature and scope of advice is known, disclosure is completed that commission will be payable on completion of the contract at the rate of x% of the first year’s premium (i.e. how it is determined)
- When advice is given, no further disclosure is required in the event that the disclosure already given remains unchanged, albeit the choice remains to additionally disclose the actual commission amount payable of $xxx, even while noting that the regulations do not explicitly require $ disclosure, unless “a reasonable client would expect (the $ commission, as opposed to information as to how it is determined) to, or to be likely to, materially influence the advice given by A.”
A share-broker can reasonably say they do not know the price (and therefore the fee or commission) in dollar terms until the trade is done – as prices can fluctuate a lot, and very frequently. It is common share-broking practice to disclose the actual fee or commission on the contract note issued for the completed transaction.
An insurance adviser generally knows what commission is most likely to be. If a case comes back from underwriting with an offer of terms the question is then whether financial advice is being given around the acceptance of the terms. Should you disclose a dollar rate on application and restate that for the offer of terms? Or should you only provide dollar disclosure when terms are known? Arguments could be deployed in support of either. I know that it is possible that every case could be issued at different terms to those quoted, but for most advisers, a solid majority of cases are issued at ordinary rates.
Research in Australia shows underinsurance increasing and predicts that in the near future only the very wealthy will be able to access personalised advice from an adviser, due to recent regulatory changes. This is the consumer version of those stories we have been sharing about the number of Australian advisers leaving the sector.
“On the current trajectory, within three years, only the wealthiest 15 per cent of Australians will be able to access life insurance with personal advice,” the group said.
Read more here, by Sarah Kendell, at Independent Financial Adviser.
After being delayed because of COVID-19, MBIE have announced that the new financial advice regime will begin on 15 March 2021. In addition to the new date being set, the Government has set new disclosure requirements as part of the Financial Services Legislation Amendment Act to ensure that customers have the ability to make more informed decisions. Advisers will be required to disclose their services and other relevant information. This will allow potential clients to decide if the service on offer is right for them.
“The new disclosure requirements will require businesses and individuals who give financial advice to disclose important information about their services to their clients.
“The disclosure requirements are set in regulations under the Financial Services Legislation Amendment Act, which introduces a new regulatory regime for financial advice,” said Sharon Corbett, manager financial markets at the Ministry of Business, Innovation and Employment.”
On disclosure, the details confirm that as expected a progressive disclosure regime is being put in place, much along the lines suggested by the consultation. We think that is good - it makes sense, and it allows the right level of information for each stage of the sales process. It will not please everyone, some prefer the certainty of fixed requirements that are all dealt with at a specific point in time, especially if they have a very simple (and short) advice process.
UPDATE: because I was asked: yes, dollar disclosure of commission payments is required. A range might be disclosed at one point and a specific figure disclosed when known.
More important, perhaps, is the start date for the new regime. I cannot underline enough how important compliance assurance is as you come up to this date. There are some simple steps you can take to get yourself to a point of comfort.
- Refer to a detailed list of all the reference standards required to achieve compliance - call or write to ask me for such a list if you need one.
- Conduct a gap analysis against the full range of requirements.
- Start at the top - ensure your governance structures are in place, this is the engine that drives all effective compliance practice
- Fill in the processes required against the gaps identified, reporting into your governance process on a regular basis
Much of the commentary does not link directly to the documents, so here is a good digest of links for you:
The disclosure requirements page on MBIE's website: https://www.mbie.govt.nz/business-and-employment/business/financial-markets-regulation/regulation-of-financial-advice/regulations-to-support-the-financial-services-legislation-amendment-act/disclosure-requirements/
The overview of the disclosure regulations: https://www.mbie.govt.nz/dmsdocument/11508-regulations-setting-out-disclosure-requirements-in-the-new-financial-advice-regime-overview
The FMA's media release on the start date for the new regime: https://www.fma.govt.nz/news-and-resources/media-releases/fma-welcomes-start-date-of-new-financial-advice-regime/
The regulations in full: http://www.legislation.govt.nz/regulation/public/2020/0132/latest/whole.html#LMS177125
In other news:
Fidelity Life: New Learning Management System for product accreditation and eLearning to be launched soon, Fidelity Life: New Sharecare challenges will begin 1 July 2020
Fidelity Life: Golden Life Plan will be no longer be offered to new applicants from 1 July 2020
Submissions on the Financial Markets (Conduct of Institutions) Amendment Bill have been released on the Parliamentary website. Available via weblink at https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/document/BILL_93443/tab/submissionsandadvice?Criteria.PageNumber=1
The release of the submissions was highlighted for us in the Investment News e-mail received recently, with the specific COFI story available at https://investmentnews.co.nz/investment-news/amp-finds-cofi-hard-to-swallow-industry-calls-for-sweeteners/
Noting that there are 53 submissions, I am, of course, glad to see the quote from one of our preferred compliance consultants (Rob Dowler) who had their submission selected and included in the Investment News article.
I encourage readers to consider the article. In particular the central question of having different principles for each participant, and the limited range of initial participants. Contrast that with the suggestions for a single set of requirements for fair treatment, and extending these to a wider range of companies.
As submissions are supported by the exploration at Select Committee hearing next week it will be interesting to hear if the definitions of incentives may come in for some discussion. Regular readers will know that we consider the definition to be too vague for distributors to have long-term confidence in the approach to remuneration - discouraging investment and delaying a shift to more spread commission models preferred in Australia.
Investment advice businesses appear to have been experimenting with different structures to manage, mitigate, or eliminate conflicts of interest for some time. See story below. I have heard of a few in the insurance sector - usually people offering options rather than an entire change of business model - but they are rare. Models that I have see offered: true nil commission options with a fee for placement, another Advice for fee and no offer of placement, another fee and commission refund (varying terms), and others simply presented hourly paid options. We have not yet seen these coupled with environmental, social, or governance goals explicitly as in the case below, although often proprietors are concerned about those issues, they are not wired in to the business. Perhaps that's an opportunity.
Donna Nicolof, who was the former head of BNZ's Private Bank has established Pāua Wealth Management. Donna has stated that the firm is determined to eliminate any conflicts of interest and remain independent. When analysing and making decisions, investment managers will be required to consider different external factors including environmental, social, and governance factors.
"Pāua Wealth Management has created a business model to support the independence and integrity of its advice and remove potential conflicts of interest, Nicolof says. She has said no to product commissions or referral fees in favour of a fees-for service approach.
“We believe New Zealand investors deserve truly independent advice and the better outcomes this delivers. We only receive fees agreed to by clients so they can be confident that we act only in their best interests,” she said.
“We do not manufacture investment products and our advisers are not incentivised to sell particular products or trade on clients’ portfolios, which can create conflicts of interest. We are motivated by delivering quality advice and superior service,” she said.” Click here to read more
In other news:
It has been announced that AIA will be offering additional support to advisers. In the announcement AIA stated that they will be offering advisers commission boosts in two parts. The first will be focused on offering advisers 20% extra Basic Initial Commission on AIA Living applications submitted using eApp. This offer is being extended until 1 September 2020. The second method will be to offer a commission boost as part of their small business support package. AIA is looking to offer an additional 20% Basic Initial Commission on AIA Living applications submitted using eApp. This offer will run from 2 June 2020 until 1 September 2020.
“So far, 2020 has been a challenging year for us all. At AIA we want to help support you, your business, and your clients to make 2020 memorable for the right reasons.
We know from your feedback that the current biggest issue for you and your business is cash-flow.
That’s why we’re excited to be launching our 20/20 in 2020 offer that has two components: sharing the value of going digital and our new small business support package.”
In other news:
During the Financial Advice NZ webinar, Minster Faafoi spoke about his commitment to ensuring that the conduct bill progresses while also highlighting that he is conscious of the importance of having enough lead-in time. During the webinar, the Minister spoke of how the Government understands that commissions are a legitimate way of paying advisers and as a result, the Government isn’t seeking to ban commissions, instead is looking to end target-based incentives.
“In a webinar with Financial Advice NZ, Faafoi acknowledged that concern and said he did not want the conduct regime to add another layer of complexity of regulation on top for advisers.
The bill in its current form also allows regulations to dictate remuneration structures, which some industry participants have expressed concern about.
Faafoi said Government recognised that commissions were a legitimate way of paying advisers for their “important work” because consumers were generally unwilling to pay for financial advice. He said the Government was aware that commission structures were the way the sector had operated for decades.
“It is not the Government’s intention to ban all commission.” Click here to read more
It would be a great relief to advisers and insurers if it could be clearly discerned from the Bill that the power to ban commissions is reserved. At present the definition of incentives in the law can be read as including all normal commission payments, which is unnerving when long-term decisions need to be made.
In other news:
Fidelity Life have extended the registration period for Customer Engagement 2020. Advisers now have until 6 April 2020 to register to be in the running to attend a Thought Leaders forum in Te Anau in October.
- Runs from 6 March – 31 July 2020
- Based on Net Promoter Score – a measure of customer satisfaction
- Top 30 advisers plus partners attend a special forum in Te Anau, 14-16 October 2020
- Advisers need to register by 6 April to participate