National questions limits on adviser incentives

National MPs have questioned the need for a bill that brings in new conduct requirements for insurers, banks and non-bank deposit takers.

It passed its first reading yesterday and will likely force insurers to monitor their adviser distribution channels more closely.

Commerce and Consumer Affairs Minister Kris Faafoi said conflicted remuneration and incentives were one of the biggest issues driving poor outcomes for consumers in the financial sector.

The bill will allow regulations to be set to govern those.

"The bill will also create the ability to prescribe regulations relating to incentives which financial institutions and their intermediaries will be required to comply with," Faafoi said when he spoke in support of the bill.

"These regulations will be the mechanism through which sales incentives based on volume and value targets will be prohibited, and this prohibition applies not just to licensed entities but also to all intermediaries throughout the supply chain. It's also about any and all incentives, whether monetary, such as commissions, bonuses, or other non-monetary rewards like leader boards or trips abroad."

But National MP Brett Hudson said his party would not support the bill in its current form.

Reports by the Financial Markets Authority and Reserve Bank had not shown instances of bad behaviour, he said, and FSLAA had introduced a simple way of dealing with the same matters this bill sought to address.

"I also want to spend some time on ... this regulation-making power, which the Minister's own words tells us pretty strongly is all about banning incentives," he said.

"Well, first problem is it's simply a blanket regulation-making power, which means that if we agree to this, then the Minister and their officials will fundamentally be able to decide at their whim what incentives can be curtailed or banned, what roles they can apply to at any time – any time at all. So it's signing a very blank cheque for that sort of power-making to what, in effect, is officials, because this Government won't argue with their officials on these sorts of matters.

"How are these businesses going to transact if they don't have people actually selling their wares to customers? It's how businesses operate. Whether they're a product business or a services-based business, someone's actually got to sell the offering to the client or customer.

"The reality is the people that put themselves in that position as salespeople tend to be people that value the risk and reward that comes with being successful. They tend to sacrifice some salary up front with the possibility of overachieving if they deliver against a set of sales targets – all of which should be and normally is managed by controls across the business.

"The Minister tonight said that the sales incentives they want to ban are the ones that are based on volume or value ... I challenge anyone to name me a sales incentive that is not either based on value of sale, or sales, or volume. It's fundamental. So if his intention is to ban sales incentives to do with volume or value, he's basically just said to us all his intention is to ban every sales incentive he possibly can. It's ludicrous."

Labour MP Deborah Russell argued there was a balance to strike.

"At what point does a commission provide an incentive, so that instead of selling the customer a product they genuinely need or a product that will genuinely serve them, the real service that is performed is the commission that is paid to the sales agent? That's a very tricky point to judge.

"Now, this bill does not set out to make that judgment in itself, but it does require institutions to set up rules for themselves as to how they will conduct themselves to set up understandings in institutions as to what is a reasonable way to remunerate sales staff and what is not. I think it is worth remembering that in terms of these so-called sales staff, in some institutions these are bank tellers. They are financial advisers. Their objective is to help a customer or a client to structure their finances as best possible, but their advice is being skewed by the presence of a commission. So how do we get institutions to regulate that? Well, we invite them to think about them themselves, and this is what this bill does."

Her colleague Greg O'Connor said he was chair of a mortgage company when the lending margin was 400 percentage points.

When that margin dropped, pressure went on to offer other products such as life insurance, he said, to maintain profitability.

"And what quickly became clear was that we were going to have to incentivise a lot of people for us to make any money and the only people who were going to suffer were going to be our customers. So we exited. So I have a firsthand account or experience of that change in incentive."

He said there was no reason to think that bad behaviour that had been found in Australia had not happened here.

There were 63 votes in favour of the bill and 57 against. The Finance and Expenditure Committee will report back by June 23.

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