Regulators’ soggy bus ticket didn’t work

The Reserve Bank and FMA are disappointed life insurers thumbed their noses at a conduct review in January which didn't name and shame or prosecute. So the regulators have given them more time and are set to let them keep charging up-front commissions, albeit with a requirement they look after customers first, Bernard Hickey reports.

Surprise, surprise. The waving of a wet bus ticket did little to encourage New Zealand's life insurers to behave better.

That's the second conclusion that can be reached after the Reserve Bank and the Financial Markets Authority were disappointed in the lack of action from life insurers following a warning in January that improvement was needed.

Back in January, the regulators huffed and puffed about poor behaviour after a review of conduct and culture by the industry found hundreds of cases where life insurers had over-charged and misled customers. But the regulators also failed to either name or shame the culprits, or take them to court. Instead, they demanded proof of a change in approach by June 30.

That date has come and gone and now they they are disappointed with the response.

The first conclusion of the whole exercise is that a full Royal Commission into banking, life insurance and funds management is required here to publicly name and shame those responsible and drive real change, as has been seen in Australia.

The Government, the Reserve Bank and the FMA have argued a Royal Commission was not needed because the industry was cleaning up its own act and regulator pressure, rather than a full inquisition, would be faster and more effective.

Today's results show how flawed the softly-softly approach has been.

It also shows how conflicted the regulators are, given they are required by law to maintain confidence in the financial sector and ensure its stability. Exposing its flaws in public would do that, but the Australian exercise showed the public's faith could be maintained, even when the dirty washing was taken out in public.

'The washing is still dirty'

The FMA and Reserve Bank said on Tuesday after reviewing the life insurers' response to their January report that they were disappointed with the response, but again failed to name and shame the culprits. 

“While we’re disappointed, we’re not surprised as the responses confirm what we found in our original review. It’s clear that progress has been slow and not as far-reaching as required. Some providers have started work to identify the customer and conduct issues they face, others have not provided any detail on this," FMA CEO Rob Everett said in a release.

The FMA and Reserve Bank asked 16 unnamed life insurers to detail their work plans to address the findings and recommendations in January.

“We’re disappointed the industry’s response has been underwhelming," Reserve Bank Governor Adrian Orr said.

"The sector has failed to demonstrate the necessary urgency and prioritisation, around investment in systems, to provide effective governance and monitoring of conduct risk," he said in a joint release with the FMA.

The FMA and Reserve Bank noted some unnamed life insurers did not complete the required systematic review of policyholders and products, while others did not say how many policy holders were affected by wrongdoing or give the potential cost of remediation.

Insurers that completed the review identified at least 75,000 customer issues requiring remediation worth at least $1.4 million.

They included overcharging of premiums and benefits not being updated due to system errors, human errors and under-reporting of deaths.

The FMA and Reserve Bank reported "poor customer conversations overlooking eligibility criteria and poor post-sale communications, which lead to declined claims and underpayment of benefits".

They did not detail which claims were denied or underpaid. They also noted "poor value products were identified, where premiums charged were not fair value for the cover provided," but again did not identify which firms or products were responsible.

Commissions look like staying

The FMA and Reserve Bank said they remained concerned about life insurers using high up-front commissions and offering 'soft' commissions such as overseas trips to advisers, but appeared set to let the industry keep doing it.

"Although some insurers have committed to removing sales incentives for employees and their managers, not all committed to removing or altering indirect sales incentives," they reported back on Tuesday.

Providers using external advisers told the regulators that "changing long-held business arrangements and distribution models is difficult and will take time to implement."

“We’re ready to work with life insurers to ensure they prioritise their focus on serving the needs of their customers, while at the same time balancing the need to remunerate advisers for the important work they do to help these customers," Everett said.

"But we do not think high up-front commissions create confidence that insurers and advisers are acting in the best interests of customers,” he said.

The FMA and Reserve Bank said those companies that had not undertaken comprehensive systematic reviews of policyholders and products had been asked to "complete further reviews of their systems to identify issues, and to develop mature plans to respond and remediate any of their findings." They gave a new deadline of December this year.

They said they would "continue to monitor how the insurers are responding to recommendations and implementing their work plans".

They also pointed out that life insurers were currently not legally required to become more customer-focused. They hinted that legislation would be required to ensure life insurers had to act in the best interests of customers.

"Deficiencies in some of the plans received, and some insurers’ lack of commitment to implementing the regulators’ recommendations, further demonstrates the need for additional obligations to be included in the regulation of conduct of life insurers."

Faafoi also disappointed

Commerce Minister Kris Faafoi also said he was disappointed with the insurers' response. But he also appeared likely to allow life insurers to keep their upfront commission-based sales tactics, albeit with a potential requirement they work in the best interests of consumers.

“Disappointingly, in many cases the responses from some life insurers show slow and inadequate progress, and I share the regulators’ concern,” Faafoi said in a statement.

”Many of the plans life insurers provided to the RBNZ and FMA for improving their internal systems were poorly expressed and incomplete. Some life insurance companies also appeared to be trying to ‘pass the buck’ to the brokers and advisors they use to sell their products," he said.

“I do acknowledge that some life insurers have made commitments to address issues, and are moving in the right direction. However, overall the industry still has work to do."

He said the Government had been working to fast-track measures to improve conduct in the financial sector, and would announce action on this shortly.

“We know the wider financial services sector – including both banks and insurers – hasn’t been putting customer interests top of mind. Sales incentives are a big part of the problem. Incentives play a useful role in some cases and we don’t want to remove them entirely. But when insurers sell financial products and services, the focus needs to be on the customer and not just on profit."

“We plan to introduce a regime where banks and insurers are primarily focused on their customers."

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