Time to take the initiative........
Taking stock of the release of the FMA report on the replacement of life insurance business, there appears to have been a mixed reception for the report’s conclusions. Certainly, constant references to advisers being paid 230% commissions are as unhelpful as they are inaccurate. And to be honest, the findings of the report, while in one sense disappointing, are hardly a surprise. The targeted advisers had already been selected based on the FMA’s criteria of high activity/high replacement, so the discovery of incidences of churn hardly came as ‘unexpected’.
However, the report will be welcomed by all right-thinking Financial Advisers who wish to see churning eliminated.
There is no justification for churning and the sooner stakeholders collaborate to eradicate the practice from the industry, the better everyone will be.
Legitimate replacement, on the other hand, is perfectly acceptable and managed properly, forms an appropriate and vital part of a Financial Adviser’s responsibilities to clients. There is an initiative underway to develop a collaborative approach to replacement where all parties involved are aware of, and agree to, the proposed action.
So, the industry is taking steps to address the issue, but it will require the participation and co-operation of the product providers to be effective. Time will tell if this initiative succeeds.
The FMA report was also critical of the commission structures offered by product providers, and on this point, I urge caution.
The existence of commission in a product does not create a conflict of interest, but the behaviour that can and, in some cases, does produce conflict, is most definitely the issue.
Therefore, the first and most important step is to address the behaviour and the FMA is to be commended for doing just that with the release of this report.
But the suggestion that compensation structures should be influenced, controlled, or regulated is a different matter and needs to be given careful consideration. The examination of regulated commission environments from Europe in the Oxera Report “Regulating remuneration systems: effective distribution of financial products” concludes that regulatory intervention in commission structures does not achieve the desired outcome and works to the disadvantage of the consumer.
One of the stated objectives of FSLAB is to increase consumer access to financial advice – reducing compensation while at the same time increasing compliance costs and complexity will defeat that objective.
If the regulator is looking for the industry to step up, then the soft dollar offerings are fair game, and, in particular, the much-vaunted overseas trips. Most advisers treat these affairs as a reward, but there are also those who, as the FMA report confirms, place business to qualify for an invite.
I appreciate that recommending a ban on these incentives will draw the ire of some advisers, but the whole idea of these trips demeans the status of the Financial Adviser and dilutes the integrity of independent financial advice. And the argument that there are other industries that do likewise doesn’t wash as Financial Advisers should subscribe to higher standards commensurate with the responsibility attaching to the role.
The industry has backed itself into a corner with these offers and nothing short of external intervention will be needed to resolve the dilemma. Any collaborative action to avoid ‘first-mover disadvantage' by product providers will likely draw a response from the Commerce Commission, so an edict from the relevant authority is necessary to achieve the objective.
I doubt if any product provider CEO will mourn the passing of these incentives as the loss of production as well as the cost of funding has a double hit on profitability.
And any CEO who is concerned should take heart as AIA grew very successfully for 8 years during my time in charge without the offer of a single overseas trip.
The FMA report has provided direction for the industry to act and address key issues that inhibit the development of a professional Financial Advisory sector and failure to take appropriate steps will not go well for product providers, advisers, and ultimately, consumers.