Government has moved closer to implementing a volume- and target-based financial product sales incentive ban after unveiling new draft regulations last week.
The proposed regulations built to support the Financial Markets (Conduct of Institutions) Amendment Act – or COFI – will introduce wide-sweeping changes to how banks and insurance companies push products both internally and through third-party distributors.
According to the Ministry of Business, Innovation and Employment (MBIE) discussion document: “Once the CoFI regime comes into force, financial institutions and intermediaries involved in the chain of distribution to consumers will be required to comply with regulations that regulate incentives.”
Volume-based incentives have been especially popular in the life insurance industry where providers often have sales target-linked agreements with third-party distributors.
Most NZ banks and insurance companies moved to drop sales volume bonuses for internal staff following regulatory conduct reviews of the sectors in 2018.
After COFI passed into law this June, Commerce Minister David Clark said: “… the reviews found a major imbalance in power between financial institutions and consumers, products which had been designed without good customer outcomes in mind, sales incentives based on volume or value targets and generally weak systems for managing risk.”
But the rules will prohibit almost all volume-based sales remuneration practices including those bundled up in so-called ‘balanced scorecards’.
Many financial institutions have adopted the balanced scorecard approach to determine employee bonus income based on factors such as customer satisfaction ratings in addition to raw sales figures.
“However, only the volume or value sales target-based portion of the balanced scorecard is subject to the prohibition,” the MBIE paper says. “Balanced scorecards can continue to be used provided they do not contain metrics based on volume or value sales targets.”
The draft regulations also limit the volume-based incentives carve-out for ‘senior managers and executives’ tabled in the earlier Cabinet decision.
“To the extent that senior managers and executives are not ‘involved’ in the provision of the service or the products, they would not be captured by the prohibition,” the MBIE document says. “To the extent that a senior manager or executive is ‘involved’ (e.g. in a small financial institution or financial advice company where one person is the sole director and manager) then we consider it is appropriate that the prohibition applies to them.”
Flat product commissions that do not vary according to volume or targets, however, will remain legal once COFI comes into force.
MBIE also published the proposed COFI licensing fee schedule last week with initial standard licensing costs set at about $1,000 per institution and a further $615 charge for assessing ‘authorised bodies’.
The Financial Markets Authority (FMA) will tack on further charges (of $115 plus $178.25 per hour) for any COFI licensing work that goes beyond the standard 5.75 regulatory hours set aside to complete the process.
About 100 institutions are expected to be licensed under the COFI regime, which comes into force in 2025 with final regulations slated for release early next year.
Submissions on the sales incentives and COFI licensing fee proposals close on November 9 and October 26, respectively.