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Chapman Tripp Partners Penny Sheerin, Tim Williams and John Knight discuss the wide-ranging impact of the Financial Markets Authority and Reserve Bank of New Zealand review into the life insurance industry. The implications of this review for the industry should not be underestimated; there are plainly risks that the changes imposed will add significant compliance cost and will impact on existing modes of doing business, they write.
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Chapman Tripp lawyers will present on a range of topics at the Trusts and Estates Symposium on Wednesday, 20 March and, the Employment Law Reforms Conference on Friday, 22 March.
The Financial Markets Authority (FMA) and Reserve Bank of New Zealand (RBNZ) review into the life insurance industry has delivered a ‘high noon’ moment to the 16 life insurers active in the New Zealand market – and its influence will extend well beyond them.
The FMA and RBNZ are clear that “all insurance sectors should be actively considering conduct risk within their business” and the Government will fast-track legislation to address the consumer protection issues highlighted in the report, and will apply the changes also to the banking sector.
This will run alongside the reforms to insurance contract law that are currently underway.
The FMA/RBNZ report found “extensive weaknesses in life insurers’ systems and controls”, including weak governance and management of conduct risks and a lack of focus on good customer outcomes.
It also found that efforts to remediate issues in the past had been “generally very poor” and that the industry had been “too complacent…and not focused enough on developing a culture that balances the interests of shareholders with those of customers”.
The criticisms were expected as both the RBNZ and the FMA had telegraphed their concerns in advance:
- the RBNZ through the publication of a graph in the November Financial Stability Report showing that New Zealand has the highest reliance on commission payments in the OECD, and
- the FMA through multiple investigations over recent years.
Despite those criticisms the report concludes that it would not currently categorise instances of poor conduct and potential misconduct as widespread and that while some issues are similar to those highlighted in Australia, they are on a “much smaller scale”.
Industry recommendations
Key recommendations for life insurers include:
Incentives
- the removal of internal sales incentives by 31 December 2019 or (if they are not removed), an explanation of how conflicts of interest will be mitigated
- high upfront commissions to be abandoned and other commission structures and volume bonuses for intermediaries to be reviewed to ensure they incentivise good consumer outcomes
- the qualifying criteria for soft commissions to be reviewed for their incentive effects – i.e. that they don’t simply reward volume or value of sales, and
- intermediaries to be encouraged to disclose all commissions to the customers.
Product design
- new products to be designed to provide good customer outcomes
- products to be reviewed on a regular basis to ensure they are relevant and fit for purpose, and
- insurers to engage with customers to consider their needs and the suitability of their insurance cover.
Issue identification and remediation
- to put appropriate systems and processes in place to record and resolve customer complaints and incidents, and training for staff so that they know how to recognise and deal with these situations, and
- to establish formal remediation frameworks and policies, adequately resourced and with a mission to act on matters proactively and without undue delay.
The report also recommends that the Government, as part of its review of insurance contract law, addresses the regulatory gaps around the FMA and RBNZ’s powers to respond to life insurer misconduct.
The FMA and RBNZ will be providing specific findings to each insurer by the end of February 2019 and will require them to report back and provide an action plan to address the feedback by 30 June 2019.
Government response
The Government announced yesterday that it will legislate to respond to the findings of the insurance report and of the report on banking conduct and culture released in December. The proposed changes will promote:
- clearer duties on banks and insurers to consider a customer’s interests and outcomes, and to treat customers fairly
- an appropriately resourced regulator to monitor the conduct of banks and insurance companies, with strong penalties for breaching duties
- changes to both banking and insurance regulation, as the issues identified in both are similar. There are also overlaps between the sectors, with banks also selling insurance products, and
- a strong response to internal sales incentives and soft commissions.
While the scope of the legislative changes has not been explained in detail, Cabinet has specifically agreed “to get rid of sales incentives in the insurance industry that are driving behaviour that is not in the best interest of consumers”.
A consultation paper will be released in May and legislation will be introduced later in the year. This will run parallel to the review of insurance contract law, with the intention that both bills will be in Parliament by mid-2020.
Chapman Tripp comments
The recommendations in the report, as well as the new legislative changes announced by the Government, are driven by a view that the customer should be put at the centre of all aspects of the insurance relationship. This was already a major theme of the insurance contract law review announced in 2018.
The implications of this review for the industry should not be underestimated. There are plainly risks that the changes imposed will add significant compliance cost and will impact on existing modes of doing business.
The Government’s announcement that it will fast track legislative changes, including the introduction of a regulator to monitor the conduct of insurers, indicates that a more “hands-on” approach will be taken. But the degree of regulation which is imposed will depend upon the Government’s assessment of how much the industry can be relied upon to be self-regulating and to keep its own house in order.
In order to manage these risks insurers will need to be able to demonstrate that effective strategies can quickly be put in place to address the report’s major criticisms. This will not prevent regulation but may temper the possibility of regulatory overreach.
Penny Sheerin advises extensively on the full range of legislation affecting fund managers and financial service providers, including the Financial Markets Conduct Act, Financial Advisers Act, Financial Service Providers (Registration and Dispute Resolution) Act, Anti-Money Laundering and Countering Financing of Terrorism Act, Insurance (Prudential Supervision) Act, the trans-Tasman mutual recognition regime and non-bank deposit takers laws. She advises clients on the establishment, restructuring and compliance of investment products and on mergers and acquisitions and corporate restructurings in the financial services industry. Penny is recognised as a leading lawyer in Chambers Asia Pacific 2019 and “is recognised for her strong client base”. One source comments: “She is a young partner who I think highly of. She is bright, dedicated and hard-working”. Prior to joining Chapman Tripp in 2002, Penny worked for the Securities Commission and Takeovers Panel. Contact Penny at penny.sheerin@chapmantripp.com or connect via LinkedIn
Tim Williams specialises in the financial services field and leads the firm’s financial services regulation and funds, KiwiSaver & superannuation teams. He has been a leader in the financial services and investment funds sectors for over 20 years, and has a wealth of practical experience across a wide range of commercial areas, having specialised in commercial law, mergers and acquisitions and IPOs. His expertise also covers securities laws, financial services licensing and compliance, anti-money laundering (AML), insurance licensing, overseas investment and restructurings. Tim is recognised as a Band 1 lawyer in Chambers Asia Pacific 2019 and is recognised as a leading individual by Legal 500 Asia Pacific 2018. He is “esteemed as the ‘leading lawyer in town’ for funds management, particularly in regard to ‘modern investment structures’” – Chambers Asia Pacific 2016. In the Chambers Global 2012 edition, he was “the best all-round adviser on funds management” and a “prominent expert in securities” and in its 2013 edition, he was described as “very capable across many different areas”. Tim is also listed in the EuroMoney Guide to the World’s Leading Banking Finance and Transactional Lawyers 2016 as one of the outstanding practitioners in the field of investment funds, and in Best Lawyers 2016 as a leading Mutual Funds lawyer. Tim chaired the NZ Markets Disciplinary Tribunal Appeal Panel, and was an original member of the Tribunal (the NZX disciplinary body) where he served for the full term of 9 years. He is also a director of five 20th Century Fox film companies, and has advised the Minister of Finance on overseas investment rules. Contact Tim at tim.williams@chapmantripp.com or connect via LinkedIn
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John Knight has a broad commercial and public litigation background and has represented clients before tribunals and courts throughout New Zealand. He has strong insurance and maritime practices and advises national and international clients on commercial matters and significant disputes. John also specialises in advising clients on contentious environmental and planning issues (including within New Zealand’s maritime environment). John is recognised as a leading individual in Legal 500 Asia Pacific 2018. He is also recognised as a Band 1 lawyer in Chambers Asia Pacific 2019. He is a member of the Resource Management Law Association (RMLA), New Zealand Insurance Lawyers Association (NZILA) and is a committee member of the Maritime Law Association of Australasia and New Zealand (MLAANZ). Contact John at john.knight@chapmantripp.com
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