It has released its report into soft commissions.
It follows its investigation into replacement business and insurance “churn” and was in part prompted buy the International Monetary Fund’s assessment of the financial sector in 2017. That report recommended the FMA refine its supervision by enhancing insurance intermediary and insurer regulation and supervision.
The FMA said it was interested in soft commissions because they presented a conflict of interest for advisers, which its earlier work had indicated some advisers were unaware of their need to manage.
The regulator found that insurers offered 242 different instances of soft commissions to advisers over a two-year period.
More than 50% of the $34 million they spent on them was on trips, although they were only 29 of the instances of soft commission and only 800 advisers went on them.
They spent $5.5m on professional development and $3.8m on events for advisers.
The total spend on soft commissions was equal to 9% of the sales revenue that insurers received in the same period from policy sales by advisers.
Nearly half of the soft commissions, and all of the trips, required advisers to meet a target.
One insurer spent $209,000 while another spent $12 million on soft commissions. In one case, a trip to London cost $95,000 for each of the 20 advisers who went. The average value of each trip was $623,000 or $22,000 per adviser.
"Overall we found the financial benefit to insurers from providing soft commissions is small," the FMA said.
"This suggests that there are other non-financial reasons for insurers to continue offering soft commissions to advisers. One potential reason is that it results in increased loyalty from advisers. This is particularly the case where insurers require advisers to place a certain percentage of their business with the insurer to receive the soft commissions. Another potential reason is that insurers pay soft commissions to maintain their market share and competitive position against other insurers.
"We are concerned that insurers are designing incentives that potentially set advisers up to fail in complying with their obligations. Advisers have an obligation to exercise care, diligence and skill and this, in our view, requires adequate management of conflicts of interest. Authorised Financial Advisers (AFAs) also have a code of conduct that they must comply with. Insurers must, for their part, take responsibility for conflicted conduct that results from these incentives."
When one insurer stopped doing trips during the period, its sales fell by a third.
"The FMA 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," said FMA direct of regulation Liam Mason.
"However, insurers themselves must acknowledge the need to promote good customer outcomes and take responsibility for conflicted conduct that results from these incentives.”
The FMA will show the findings of the review to MBIE.
