The Financial Markets Authority (FMA) has fired a warning shot on product commissions following a long quiet period in the incentive wars.
In its annual report released last week, the FMA notes financial product sales incentive trends have “seen encouraging yet mixed results” post the 2019 bank and insurance sector regulatory reviews.
“Sales-based incentives for staff have generally been replaced with incentives that focus more on good outcomes for customers,” the FMA says. “However, we still have concerns about commissions paid to intermediaries, and have seen commission levels increasing, after they were lowered following our initial reviews.”
The joint FMA and Reserve Bank of NZ (RBNZ) ‘culture and conduct’ investigation into banks and insurers saw institutions reform product sales incentives for internal staff but most third-party commission structures remained intact – especially in the insurance and mortgage markets.
While the NZ government has repeatedly ruled out a blanket ban on commissions, the impending Financial Markets (Conduct of Institutions) Amendment Bill, or COFI, will give regulators some influence over how institutions deal with external intermediaries.
Introduced into parliament over two years ago, COFI has been shunted back-and-forth in the order paper since an interrupted second reading last June. The legislation, expected to pass this quarter, will add extra duties to the FMA list as well as requiring up to $15 million of industry-sourced funding.
Along with COFI, the regulator stands to pick up further responsibilities under the in-situ Climate-related Disclosures law and the under-construction insurance contract bill during the next few years.
Over the 12 months to June 30, 2021, the FMA recorded a surplus of about $1.8 million on total revenue of $51.6 million (almost $1 million under budget), according to the annual report.
During the reporting period, the FMA chalked up a number of enforcement wins in addition to issuing ‘guidance’ on matters such as fund fees ‘value for money’, responsible investment (or ‘integrated’ products in regulator-speak) and direct-to-consumer platforms.
Last March the regulator also assumed control of the broader advisory industry as the Financial Services Legislation Amendment Act (FSLAA) two-year transition regime kicked off.
As at the annual report publication date, the FMA had approved over 1,800 licences and almost 1,200 ‘authorised bodies’ under FSLAA rules: all told, the regulator now holds sway over more than 10,700 ‘financial advisers’ and 12,280 ‘nominated representatives’.
In a statement, acting FMA chief, Liam Mason, said: “The FMA is growing and adapting to implement these new responsibilities, which will benefit the wellbeing of New Zealanders. It is encouraging to see through our regular surveys that stakeholders continue to see the FMA as supporting market integrity and good conduct.”
Mason, FMA general counsel, took over as interim chief last October, filling the gap between the departure of long-time incumbent, Rob Everett, and arrival of new boss, Samantha Barrass.
The regulator is also seeking a new capital markets head following the exit of Sarah Vrede last November with investment management director, Paul Gregory, named as her interim replacement.