The Financial Markets (Conduct of Institutions) Act 2022 became law on June 29. However, the practical impact of it on intermediaries could not be assessed at the time as key regulations under it had not been drafted.
The Ministry of Business Innovation & Employment recently released an exposure draft of these key regulations as part of its consultation process.
Recap
The above Act requires all intermediaries to comply with these regulations when all of the following apply:
• They pay incentives to their employees or agents (or another intermediary), and
• They are involved in the sale of an insurance policy, and
• That sale is to a consumer.
The Act defines a consumer as a policyholder who enters into the contract wholly or predominantly for personal, domestic, or household purposes. Where there is a dispute about this, the onus is on the intermediary to prove that this was not the case.
The Act defines an incentive very widely; it expressly includes traditional linear commissions common in the insurance industry e.g., a 10% commission on every policy sold.
Proposed regulations
The proposed regulations then narrow all this.
They prohibit a ‘prohibited incentive’ as defined. The definition adds a constraint to the Act’s definition of incentive and limits it to incentives based on a target or other threshold that relates to volume or value of insurance policies sold. The regulations give the following example of a prohibited incentive:
The employee of a life insurer is offered a $1,000 bonus for selling 100 life policies in a 3-month period.
Consequences for intermediaries
We see the following consequences for intermediaries:
1. The definition does not apply to any linear commissions, regardless of amount. This is emphasised by an example in the regulations of a non-prohibited commission, which is stated to be a 5% commission for each life policy sold. So long as the commission payment is only payable on a per policy basis, it is linear and exempt.
2. The definition does not apply to the commission an underwriter pays to an underwriting agent. This is primarily because the underwriter neither ‘arranges’ nor gives ‘regulated financial advice’ in relation to its insurance policies (see the definition of ‘involved’ at section 446SA (3) of the Act, that forms part of the definition of ‘intermediary’.
3. Where the definition does apply, it makes no difference that the prohibited incentive forms part of a larger group of incentives that are exempt. The prohibited incentive remains prohibited without affecting the exempt incentives.
4. The prohibition may apply to some profit share agreements depending on how they are formulated. If they are a set mathematical formula applying traditional insurance ratios regardless of the volume or value of policies sold, they are probably exempt because there is no target. However, if they set a target related to volume or value of policies sold before any profit share is payable, they are probably prohibited.
We can see from the above that the rationale behind the regulations is to prohibit incentives that reward reaching a target or threshold. This conflicts with the duties to the customer to look after the customer’s interests.
We conclude by noting the strange way this regime has been drafted. Why have an Act that expressly includes linear commissions, only to have regulations then expressly exclude them from the ‘prohibited incentives’ the Act regulates. It seems the Act was passed before a final policy decision had been made about linear commissions.
Please feel free to contact us if you require any further information.
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Crossley Gates | cgates@keegan.co.nz
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Frank Rose | frose@keegan.co.nz
