New Zealand's investment watchdog has sanctioned 11 life insurance advisers and is 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.
The Financial Market Authority zeroed in on the 24 advisers after an investigation into the sector in 2016 raised concerns that some advisers were likely to be acting in their own best interests by replacing insurance policies to boost commissions or get free overseas trips.
Insurance firms can pay advisers up to 230 per cent of the first year's premium up front to advisers who switch a customer to them.
Advisers who sell a certain number of policies within a timeframe can also qualify for overseas trips.
Insurers have a claw-back period of two years in which they can claim the commission back if they lose the business which incentivises advisers to wait until the two years are up before switching them to a different company.
The 2016 report found around 200 advisers out of 3700 in the sector had a high estimated rate of replacement business.
Liam Mason, head of FMA director of regulation, said it decided to look at a smaller subset of those advisers and chose the group based on those who went on a high number of overseas trips, the influence of soft commissions and replacement of policies that were not very old.
Mason said while the sample was not representative of all insurance advisers or the adviser industry as a whole it was still disappointed by its findings.
"The majority of the advisers didn't seem to recognise that the model created any conflict of interest."
Of the 24 advisers it looked at 17 were registered financial advisers and 7 were authorised financial advisers.
Authorised advisers have to be individually licensed by the FMA, meet a minimum qualification standard and obey a code of ethics which includes putting customers' interests first.
Registered advisers do not have to meet the same standards and do not have to have any qualifications or disclose how they are paid.
But the FMA said registered advisers were still legally required to exercise 'care, diligence and skill' in carrying out their work.
Instead, it found either half of the advisers were either not aware of the requirement or were in breach of it.
It also found very poor record keeping which the FMA said was vital for ensuring consumers understood what advice they were getting.
As a result the regulator issued four private warnings, seven compliance letters and is undertaking ongoing inquiries into the conduct for a further three advisers.
The current law means there are limitations as to what the FMA can do to sanction registered advisers but that is expected to change under the revamp of the Financial Advisers Act and the Financial Services Legislation Amendment Bill when all advisers will have to put the interests of the consumer first.
The change is expected to take several years to transition into the sector.
Mason said consumers concerned about getting good advice should refer to information available on its website and ask questions about the difference in cover between their old and new insurance, what the qualifying period was and ensuring full disclosure.
"If an advisers is only giving adviser on the new product they have an obligation to highlight that to the customer."
He urged those not happy with their advice to contact the FMA or the dispute resolution provider for the adviser.
The report also points the finger back at the insurance product providers themselves and says they need to step up to mitigate conflicts of interest.
"Insurance providers need to take responsibility for mitigating areas of poor and conflicted conduct, since it is the incentive and commission structures they have
designed that create these conflicts."
"In Australia, this has been recognised by the industry, which has acted to re-calibrate incentive structures around life insurance.
"New Zealand providers have noted these issues in dialogue with us, but they have yet to
implement any solutions."
The Financial Services Council of New Zealand (FSC) welcomed the report by the Financial Markets Authority.
"We welcome the report for shining a light on conduct, disclosure and incentives. There's no avoiding the fact that the findings are not great and that in some areas the industry needs to do better," said FSC Chief executive Richard Klipin.
"It's important to note though that the fundamentals of the industry are sound, and that the small sample of advisers that this report is based on may not be indicative of the thousands of financial advisers who every day do great work for their clients improving their financial outcomes.
"The report notes the importance of the current changes proposed through the Financial Services Legislation Amendment Bill and the Financial Advice Code Working Group. We strongly support these changes and will continue to work closely with Government and the FMA to ensure they deliver the best outcomes for New Zealanders."