Insurers are under pressure to change the soft incentives they offer externally employed financial advisers after a report on the industry revealed nine health and life insurers spent $34 million on them in two years.
The Financial Markets Authority report found that between April 2015 and March 2017 New Zealand's major life and health insurers spent millions on paying for advisers to go on overseas trips, to conferences, for training and business support, gifts, prizes and sponsorship.
The report which included data from AIA, Asteron Life, AMP, Fidelity Life, nib nz, OnePath, Partners Life, Southern Cross and Sovereign, found $18m of the $34m was spent on trips to destinations including Tahiti, the United States, Argentina and Singapore.
Although trips were the biggest area of spending the smallest number of advisers benefited, with just 800 going away.
Paying for advisers to attend events was the most common form of incentive, with about 3000 advisers receiving that, while a similar number got gifts, rewards and prizes.
Liam Mason, FMA director of regulation, said the authority was concerned that soft incentives - which are paid on top of monetary commissions - could influence the way advisers recommend or provide advice to the public.
"We are concerned that insurers are designing and offering incentives that potentially set advisers up to fail in complying with their obligations."
The FMA initially raised concerns about the insurance industry in 2016 after it found some advisers were likely to be acting in their own best interests by replacing insurance policies to boost commissions or get free overseas trips.
Earlier this year it sanctioned 11 life insurance advisers and said it was investigating a further three after a closer look at 24 advisers found half lacked care and diligence in their advice and most failed to recognise conflicts of interest.
Mason said advisers had an obligation to exercise care, diligence and skill, but insurers also had a responsibility to consumers.
"Insurers themselves must acknowledge the need to promote good customer outcomes and take responsibility for conflicted conduct that results from these incentives."
The FMA's research found the financial benefit to insurers from providing soft commissions was small - an increase of between 1 per cent and 8 per cent of the value of the soft commission spend.
"This suggests that there are other non-financial reasons for insurers to continue offering soft commissions to advisers," the report noted.
It suggested one reason was to increase loyalty to a particular insurer.
"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."
During its research one insurer stopped offering trips and saw its sales drop by one third.
"This suggests that soft commissions definitely have an impact on adviser behaviour, and
that in some instances advisers are acting in their own interests, rather than their customer's interests."
"We are concerned that insurers are designing incentives that potentially set advisers up to fail in complying with their obligations."
Mason said the FMA would like to see insurers take a harder look at the incentives they offer.
While it believed advisers had to be paid to do their job Mason said insurers needed to make sure the incentives they offered were designed in a way to best help consumers.
Asked if that meant insurers should get rid of overseas trips he said: "Looking from a consumer point of view it is really hard to see the benefit in overseas trips."
Mason said the authority would like to see action from insurers soon and would meet with the industry this week to demand a response.
The FMA does not regulate insurers themselves but Mason said the research would help inform changes to the Financial Advisers Act which was under review at the moment.
A shift to ensure all financial advisers put the best interests of their client first could make it hard for some current models of advice to continue, he said.
The research will also feed into an insurance law review which could set how incentives are designed.
Mason said the pending changes gave the industry a small window to act themselves.
Of the $34m one insurer, which was not named, paid out $12m in soft commissions.
Mason said it was giving the same message to all insurers but "they know who they are and we know who they are".
Industry body the Financial Services Council welcomed the report.
Richard Klipin, FSC chief executive, said the FMA's work was driving an important conversation about the use of incentives in the industry and appropriate conduct and disclosure around them.
"Ultimately, the way companies choose to structure their remuneration packages is a commercial decision and one that will differ from company to company.
"However, the FSC strongly supports the request from the FMA for insurers to consider the nature and value of the soft commissions they provide to ensure that their use of them is supporting good outcomes for consumers."
Klipin said the key issue with remuneration was the client's right to know the who, what and why of the advice they were receiving and if it was linked to remuneration at all, to ensure that any potential conflicts were property managed and disclosed.
"This hasn't always been the case and all of us have had to lift our game to ensure that our policies are driving the best outcomes for clients."
But he said changes already underway through the Financial Services Legislation Amendment Bill, the Financial Advice code working group and its own code of conduct review would represent a significant lifting of standards across the industry.
"When fully implemented these initiatives will mean a much higher standard of transparency and disclosure across the industry and that's a good thing."
What are soft commissions?
• Any gift, prize, trip, training, software, conference, sponsorship, membership payment or loan to an advisor from an insurance company.
Who is paying for the soft commissions?
• Nine insurers - AIA, Asteron Life, AMP, Fidelity Life, nibnz, OnePath, Partners Life, Southern Cross and Sovereign
What did the FMA (Financial Markets Authority) find?
• $34 million in soft commissions paid of which $18 million was spent on trips
• Nine per cent of the sales revenue of insurers $377m in revenue
• 242 different instances of soft commissions - 29 instances were trips