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FMA concerned financial advisers are pushing life insurance policies for commission, issues warnings

Thursday 22nd March 2018

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The Financial Markets Authority has warned the life insurance sector after a survey raised concerns that some financial advisers are being incentivised to push clients to change their life insurance, but says lack of disclosure obligations mean it can't conclude that definitively.

The latest update in the ongoing review of replacement business, or churn, in the life insurance industry surveyed 24 financial advisers, including 17 registered financial advisers (RFAs) and seven authorised financial advisers (AFAs).

RFAs don't have to meet the same education standards as AFAs, aren't subject to a code of conduct and don't have to disclose their qualifications or whether they're getting commissions or incentives from financial product providers to push their policies. A bill currently before select committee would require all financial advisers to meet minimum competence and conduct standard, not just AFAs, and the FMA said it's "looking forward" to that.

The review found "a clear connection between the timing of replacement policies being sold and the incentives being offered", and "a strong link between types of commissions, the end of the clawback period (the period within which an adviser must pay back a portion of the commission if the policy is cancelled) and the likelihood of a policy being replaced". Advisers can get commissions up to 230 percent of the first year's premium on a replacement policy, and other incentives like overseas trips.

Of the 24 advisers surveyed, 10 RFAs and four AFAs were then investigated individually, leading to four RFAs getting private warnings, six RFAs and one AFA getting compliance letters with no further action, and three AFAs having ongoing conduct inquiries.

The regulator said it didn't think the survey was a representative sample of all the RFAs selling insurance or the adviser population as a whole, and said it had issued warnings because it felt that was "proportionate to the misconduct."

"In future, where we find this poor conduct and unacceptable standards of client communication and record-keeping, we will take action and use stronger regulatory responses," the report says. "It was both striking and concerning that some of the RFAs we reviewed did not even recognise that conflicts of interest can arise from incentives and commission structures."

The FMA says it is now looking at the insurance practices of qualifying financial entities - organisations which employ a number of financial advisers - to see if there are similar conduct concerns in that sector, which has different incentives structures. It's also looking at the use of soft commissions and incentive structures by insurance providers, and how bank incentive structures work.


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