Another big, fat and wet bus ticket

The FMA and Reserve Bank were the wrong people to investigate life insurers who have ripped off customers. They were conflicted and a Royal Commission would have been much better, argues Bernard Hickey.

They got away with it again.

Executives and board members of New Zealand's life insurers will be quietly breathing heavy sighs of relief this morning, just as their colleagues in the banking industry did last year.

Many work for the same companies or are in partnership. And many know exactly what being exposed in public for their wrongdoing and punished in the court of public opinion looks like.

They only need to read Australia's daily newspapers and watch the litany of sackings and share price slumps and public condemnation they see convulsing through the Australian life insurance and banking industries every day because of the ongoing Hayne Royal Commission into banking, superannuation and financial advice industries.

Hayne is due to submit his final report on Friday, but many of the examples of misconduct have already been exposed and careers have ended, board chairs sacked and company share prices hammered.

The Hayne Commission is a real public inquiry with teeth that made powerful people in charge of huge companies fear for their careers. Hearings were in public. Names were named. Big names were shamed. Evidence was presented and reported on in detail as the Commission carried out its inquiries.

Consumers and agents and executives watched in horror daily as the details of awful behaviour were uncovered, including people being sold multiple life insurance policies, dead people being charged for insurance and claims rejected for spurious reasons.

Just a free consulting exercise

The 38 page review of conduct and culture of New Zealand's life insurance industry released yesterday by the Financial Markets Authority and the Reserve Bank was by comparison the dampest and flimsiest of slaps with a bus ticket.

In effect, it was a free consulting exercise for the industry and nice primer for the Government to use for tweaks to the law. Consumers were not the priority.

The FMA and RBNZ interviewed 296 staff from16 life insurers and 29 financial advisers, as well as reviewing thousands of documents, but all behind closed doors.

They identified "extensive weaknesses in life insurers' systems and controls" and saw "several instances of poor conduct and some examples of potential misconduct (ie breaches of the law)." But they said the instances were on a much smaller scale than in Australia.

"Although these conduct and culture issues resulting in poor customer outcomes are serious, the number of instances identified means we would not currently categorise them as widespread," the FMA and RBNZ concluded.

But they clearly identified specific examples where customers should be refunded at the very least, if not much worse. Instead of ordering refunds and naming the culprits immediately, they have instead given them until June 30 to come up with an action plan. Presumably, just as we've seen after last year's bank inquiry, the regulator and the industry are hoping they can quietly find the errors and refund their customers without too much fuss.

Or even worse, they will wait for customers to work it out and complain, before doing anything. That's been the industry's approach so far and this report effectively endorses that by not naming and shaming the culprits and the examples. Customers remain not-so-blissfully unaware.

Ripoffs galore, but no action

One New Zealand-based life insurer has been selling a life product to foreign customers, even though cover was only available to New Zealand residents. Another insurer incorrectly recorded customers’ dates of birth, due to manual errors, resulting in 30 customers being overcharged. That insurer is now in the process of refunding those affected customers, the FMA and RBNZ said without naming the company.

Another incorrectly calculated the impact of a consumer price index-linked premium increase by up to 30 times. In all, 223 customers were over-charged. That problem was discovered in 2015 but the insurer didn’t contact those customers, instead relying on them to complain. Three years after the event, that insurer had failed to remediate 111 of the affected customers.

The review found examples of insurers failing to cancel old policies when a customer transferred to a new policy and continuing to charge premiums on both policies. It found insurers which failed to notify policyholders of premium increases.

It found some insurers were selling credit insurance to customers who were potentially ineligible. And it found examples of insurers continuing to charge premiums on policies that had been cancelled. Again, no names were given.

One insurer had sent customers mail-outs with incorrect information, which the insurer knew to be incorrect, but took no steps to inform customers they had been sent incorrect information. This included telling customers of benefit enhancements they weren’t entitled to, and then subsequently declining claims on the basis of those customers being ineligible.

Another insurer had been charging such high premiums for funeral insurance that the amount of premiums was more than the sum insured. That insurer only remediated (ie refunded) customers who complained. Again, we can only guess who this was.

No one named, or shamed

The end result of this report was no names were named. No one was shamed. Consumers will just have to guess which one of the 16 companies investigated actually carried out the examples identified of ripping off customers. When pushed for detail at yesterday's news conference, neither the Reserve Bank's Adrian Orr or Rob Everett gave any hints, saying they were all each as bad or as good as each other.

The FMA and Reserve Bank said “it is not appropriate to name or attribute findings to any individual firms."

“While there are follow-up inquiries into specific issues, the regulators will not be commenting on the nature or identity of these inquiries. When the process is complete and in the event that misconduct is discovered, particular firms could be named as a result.”

The FMA took the same approach to a review it released in July when it said three of the 11 life insurance companies were responsible for behaviour so bad that it was considering taking regulatory action against them. It turns out that after follow-up inquiries, the FMA decided further action was unwarranted. Again, we'll never know what went on.

We are expected to wait and trust the FMA and the Reserve Bank will look after consumers' interests in the quiet time after the report. Their past record is not inspiring.

Sunlight is the best disinfectant

It's clear from reading the report that the FMA and the Reserve Bank are most concerned about the reputation of the industry and its financial soundness, rather than the interests of consumers.

Repeatedly, and as identified in this chart below, the industry has over-charged premiums and got away with unacceptable behaviour because its products are complicated and they can rely on many to just set and forget their policies.

'Please be nicer to customers'

The final paragraph in the review's executive summary of the FMA and Reserve Bank is instructive. The bolding is mine.

"Overall, our view is that life insurers have been too complacent when it comes to considering conduct risk, too slow to make changes following previous FMA reviews, and not focused enough on developing a culture that balances the interests of shareholders with those of customers," they wrote.

"Consumer trust is paramount to the effective functioning of the life insurance industry in New Zealand. We are concerned that this trust could be eroded unless life insurers – led by boards and senior management – transform the way they approach conduct risks and issues, and achieve a customer-focused culture."

They are hoping the life insurers will clean up their act quietly without eroding trust, even though that hasn't happened after repeated warnings in the past. Not much of the dodgy behaviour is new.

Everyone has known the current toxic culture of big upfront commissions to agents for churning customers through life insurance policies means New Zealanders are horribly over-charged and poorly served. See the chart above.

The central role of the FMA and the Reserve Bank is to maintain stability and trust in the financial system and financial markets. They believe a no-holds-barred inquisition of the industry that detailed its failings in public would put that at risk. So of course they haven't prosecuted life insurers or named names. They are horribly conflicted.

This was exactly what was pointed out in Australia when wrongdoing was suspected and a full inquiry was called for. Instead of getting the existing regulators there, ASIC, the Reserve Bank and APRA, to conduct the inquiry, politicians and the media called for a full independent inquiry with the powers of a Royal Commission. They got that over there and it worked. And the industry is still standing.

Show us the dirty laundry

Banks are still trading and insurers are still insuring, but now the public believes the dirty washing has been aired in public and they can begin to rebuild their trust again with executives and directors who are fearful of the consequences.

We didn't get that here and it hasn't worked.

The FMA, the Reserve Bank and the Government should have shown faith in both the public and the industry to survive an airing of that dirty laundry. Instead they shoved it deeper into the basket to fester some more.

They have made recommendations for legal reform and (surprise, surprise) have asked for more money for more regulators. That's all fine and good, but can we trust the Parliamentary process to air that dirty laundry? Not if the recent examples are anything to go by.

The Finance and Expenditure Select Committee last year balked at public hearings of committee meetings with bank executives. All we got in public in response to the Reserve Bank and FMA inquiry into banks was the same vague fluff about 'culture' and a firm wagging of fingers and waving of bus tickets.

There should have been a Royal Commission into both banking and insurance.  Sadly, we may have to wait another decade or two for the public distrust of the industry to eventually demand one, and for our politicians to front up to the immensely powerful financial industry and force an improvement.

Simply asking them to be nice won't work. They are beholden to their own shareholders and the employment agreements that incentivise them to go for the highest profits in the shortest term. Only the fear of career-ending exposure, fines and prison terms will change that.

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