FMA rejects life insurer's claim that 'bad morals' are to blame for insurance scandal

Partners Life hit the headlines in 2014 when it offered advisers who sold more than $80k worth of premiums a trip to LA, which included a dinner party at the Playboy Mansion. Photo / Getty Images

A life insurer, which in 2014 rewarded high-performing salespeople with a trip to the Playboy Mansion, claims bad individual morals rather than industry incentives are to blame for a scandal rocking the insurance industry.

Last week, the Financial Markets Authority 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.

The FMA 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.

Naomi Ballantyne, managing director of Partners Life Insurance, says it is poor morals rather than commissions which driving bad sales practices in the industry. Photo / Greg Bowker

Insurance firms can pay up to 230 per cent of the first year's premium up front to advisers who switch a customer to them, a figure which makes New Zealand an outlier globally.

Advisers who sell a certain number of policies within a timeframe can also qualify for overseas trips.

The regulator said while the 24 were not indicative of the whole industry it was disappointed by its findings which found clear links between incentives offered by the insurers and advisers selling policies.

The FMA also pointed the finger back at the insurance product providers and said they needed to step up to mitigate conflicts of interest.

But Naomi Ballantyne, chief executive of Partners Life, said given that a small group had been singled out it appeared that commissions and incentives were not the cause of poor practices, rather individual morals were.

"We are interested to note that in the small group singled out for closer scrutiny, RFA [registered financial advisers] were not disproportionately represented compared with AFAs [authorised financial advisers] suggesting it is individual morals, rather than any regulatory standard or level of qualification, which drives poor customer behaviours.

"As virtually all RFAs and AFAs receive commissions and can qualify for incentives for the sale of risk-protection products following their advice process, and only a small number have been identified as having poor practices in respect of replacement business, it is also clear to Partners Life that commissions and incentives are not the cause of poor practices, rather individual morals are."

Partners Life hit the headlines in 2014 when it offered insurance advisers who sold more than $80k worth of premiums a luxury trip to Los Angeles, which included a dinner party at the Playboy Mansion and a seat in a corporate box at a major league baseball game.

At the time, Ballantyne told the Herald on Sunday that being an insurance adviser was a lonely job where incomes fluctuated.

"There's no certainty around it. Sometimes a bit of fun is an added advantage."

In the same year, rival insurers were also offering trips to Italy, Fiji and Europe as part of incentive programmes that were designed to be motivational and educational.

But Rob Everett, chief executive of the FMA said in response to Ballantyne's comments that insurance providers cannot "shirk responsibility for the behaviour of advisers that is a direct result of the incentives designed by those same providers".

"We point to the data and findings in our report as clear evidence that incentives are influencing advisers' conduct."

Everett said it had been raising the issues with the industry since 2015.

"... and we're disappointed to see signs that the industry continues to disregard the interests of the New Zealand public and consumers."

Ballantyne was also critical of the regulator's decision to release the findings of the financial adviser sector ahead of its look into how advisers who work for big financial firms like banks and insurance firms operate.

"By drawing a conclusion that it is commissions and incentives rather than individual morals that drives poor behaviours, while still only part of the way through their research, and given such a small number of advisers having been identified as behaving poorly, the FMA risks generating consumer distrust of the adviser distribution channel and may consequently drive those consumers to other distribution channels which have not yet been investigated in the same way, or alternatively to simply not engage in any advice process at all regarding their risk-protection needs – something that would be totally counterproductive to the best interests of consumers."

She believed once that research was completed it would show poor advice practices driven by poor individual morals would be the same across all distribution channels regardless of how the person was paid.

Ballantyne said it wanted to see a minimum process and code of conduct set up which had to be adhered to regardless of whether sales person worked for a bank or as a financial adviser.

"Our view has always been to firstly regulate a minimum process and a code of conduct that must be followed by any distribution channel irrespective of remuneration structure, when giving advice regarding existing policies and then to police or audit compliance with these requirements."

She said the industry also needed to take a stronger stance by being prepared to decline or terminate an agency or employment agreement where evidence of poor morals was identified.

The laws governing the financial advice industry are in the process of being overhauled.

Under the revamp of the Financial Advisers Act and the Financial Services Legislation Amendment Bill, all advisers will have to put the interests of the consumer first under the changes.

But the change is expected to take several years to transition into the sector.