Rachael
Kia ora and welcome to Five Minutes with the FMA, a podcast from New Zealand's Financial Markets Authority. Today we're talking about how non-monetary benefits and short duration sales campaigns can heighten the risk of consumer harm if not managed and designed appropriately. I'm Rachel Joel and today I'm joined by Director of Deposit Taking Insurance and Advice, Michael Hughes. Let's start with the why?
Michael
Thank you for hosting me today, Rachel. It's great to be here. Look, under KOFI, insurers have a certain amount of responsibility, and the responsibility sits with the fair conduct program. And the fair conduct program must include effective policies. It's got to include effective processes, systems and controls for designing and managing incentives. And it's really, really important. We expect insurers to go through and mitigate or avoid any actual or potential adverse impacts or effects that these incentives might have on the interests of consumers so far as reasonably practical. Look, insurers need to go through and consider what the impact on consumers will actually be by running these incentives. We want to understand what the risk that the incentives actually bring. So are they going to influence or produce undue behaviors? Are they going to create conflicts? Ultimately, whether... consumers will be treated fairly and it's really, really important. Insurers also need to consider the inherent risk to consumer interests. So, is it going to go through and sway behaviours, etcetera? And if insurers decide to go through and run these types of incentives, we expect them to be able to show us and demonstrate quite clearly what the controls are and how do these controls work in practice.
Rachael
So with this work you're looking to understand whether insurers had the right policies, processes, systems and controls in place and were managing those risks.
Michael
Yep, look very much so. we engage with insurers. to actually understand what types of soft commissions they offer, how they design them, how they manage these benefits and the campaigns, and also how do they take into account consumers' interests, and that's really, really quite critical. So benefits and campaigns themselves can create conflicts of interest. We know that. They compromise fair treatment of consumers, and it's something that we're really focused on, Rachel.
Rachael
And what did you find?
Michael
It was mixed. Some insurers had some really good processes and policies in place. Some were a wee bit light. We would have hoped for better review of the actual incentive itself. Our encouragement is that all insurers need to actually keep records that enable adequate assessment of the actual incentive itself and what the impact on consumers is.
Rachael
Tell me more about the role that governance plays in this.
Michael
Yeah, look, the role of boards is really, really critical. of a fair conduct programme, they need in themselves to be satisfied that the policies and processes are actually in place and consumers are indeed being treated fairly. Design is one thing.
Rachael
What about management during and after a campaign?
Michael
Yeah, look, certainly some insurers went through and took a very active process. They monitored throughout the entire campaign, so looked at the actual whole end-to-end process, including what the outcomes were. Also there was a tranche that did not actually go through and even consider the intermediary in their role. Our strong encouragement is for insurers to take a very much a proactive and outcomes-focused approach to overseeing and running benefits and campaigns is absolutely critical.
Rachael
What about incentives that involve intermediaries?
Michael
Look, insurers are responsible for ensuring fair treatment of consumers, even when intermediaries are involved. That responsibility can't be delegated at all. However, we do recognise that if the intermediary is a financial advice provider, fair treatment is in fact a shared responsibility.
Rachael
When do incentives cross the line?
Michael
Look, so an incentive that's poorly designed, an incentive that's poorly managed, one that introduces undue behaviours from a consumer's perspective or an intermediary's perspective, where poor customer outcomes are also delivered. So where we don't see proper controls is a good example. So we may indeed take regulatory action.
Rachael
Okay, so what do you want insurers to do now?
Michael
Our ask of insurers is to actually have another look at the incentives that they're offering. Make sure that they're designed appropriately. Make sure that they're monitored. Make sure that they're reviewed. So have a look at their entire life cycle. It's absolutely critical. Our key focus is making sure that incentives do not unduly influence consumers or introduce poor behaviors across the ecosystem.
Rachael
Thanks so much for your time today, Michael. It's much appreciated. If you'd like to find out more about this work, go to www.fma.govt.nz. We'll see you again soon.
