Consumer advocates say the new Financial Services Council code of conduct lacks teeth and adds little to protect customers.
The FSC, the industry body for the life insurance and fund management industries, last week announced its new nine-point code of conduct to come into effect in January 2019.
Two years in the drafting, the standards exhort members to (among other things) act with competence, skill and integrity; to manage conflicts in the interests of customers; and to treat customers fairly.
Penalties for breaches range from a reprimand, a fine of up to $100,000 (payable to the FSC); and termination of FSC membership.
Details of any breaches may – but importantly may not – be made public, or disclosed to a regulatory body, the code says.
It doesn’t set particularly high standards and it doesn’t address the issue of commissions. It doesn’t say how it going to be monitored, and it doesn’t make a commitment to publish names of people in breach.
Jessica Wilson, Consumer New Zealand’s head of research, says there are far too many gaps in the new code.
“Overall it’s pretty light. It doesn’t set particularly high standards and it doesn’t address the issue of commissions. It doesn’t say how it going to be monitored, and it doesn’t make a commitment to publish names of people in breach. Consumers could be none the wiser about who has breached the code.”
FSC chief executive Richard Klipin says the organisation is putting together an “independent disciplinary committee” to review breaches. But it’s not clear talking to him how much digging, if any, the FSC will do to make sure its members abide by the codes.
Instead, Klipin suggests the council will rely on members’ own self-reporting, and on investigations from other organisations, including regulators.
“We’ll be asking members for evidence they are abiding by the code and if there are breaches going on in the marketplace, we’ll know because we are a well-connected community. Also, the FSC code sits beside the law, so if an organisation is infringing the law… the FSC will know because it will be in the public domain.”
The main purpose of the code is to generate good behaviour by telling members what good behaviour looks like, Klipin says. And he says he anticipates members will abide by the code.
Wilson says that premise relies too much on good faith – members doing the right thing. And that’s not what the evidence shows actually happens.
Investigations by organisations like the Financial Markets Authority in New Zealand and the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry have uncovered “significant issues for consumers”, including overselling, selling unsuitable or unnecessary products, and selling new products to people with perfectly good existing ones (so agents get the new commissions), she says.
Meanwhile, evidence from across the ditch suggests self-regulatory codes do not provide adequate consumer protection. A report into finance industry codes of conduct released by the Australian Treasury in September last year found two key problems:
– Codes only covered member organisations, but since membership was voluntary, some consumers didn’t get any benefit from the code. Klipin says all life insurance sold in New Zealand is issued by a member of the FSC, and 86-87 percent of KiwiSaver products.
– Codes don’t have to be approved by regulators, so often weren’t up to scratch in terms of consumer protection or enforceability.
The Australian Treasury report suggested a co-regulatory model, where financial services companies were forced to be part of a member organisation with an approved code, and where breaches and compliance had to be reported to the regulator. Klipin says that’s not being considered here.
We’ll be asking members for evidence they are abiding by the code and if there are breaches going on in the marketplace, we’ll know because we are a well-connected community.
Wilson says she’s particularly concerned about the fact the new FSC code doesn’t address hard and soft commissions. Consumer NZ and bodies like the Citizens Advice Bureau have fought for years against the often-hefty commissions paid by life insurance, KiwiSaver and other providers to the agents that sell their products. Consumer advocates argue commission are a huge conflict of interest, because instead of selling the best product for a particular consumer, agents are tempted to recommend products from companies which pay the highest commission or offer the best freebies.
Research from the Financial Markets Authority earlier this year showed nine of New Zealand’s biggest life insurers paid out $34 million in “soft commissions” (overseas trips, gifts, and flash dinners, for example) in the two years to March 2017. Of that, $18 million was for travel.
Financial Services Council CEO Richard Klipin says the eighth principle of the code covers the commission issue. “Members must manage conflicts of interest fairly and in a way that promotes good customer outcomes.”
Klipin says the fact that the financial services companies are subject not just to the FSC code, but a huge amount of public, government and regulatory scrutiny puts considerable pressure on the industry to act “in a transparent and honorable way”.
He says that’s a big change from when a code of conduct was first mooted in 2016.
“These days this is a serious and high-stakes game and our members take this seriously. The ticket to the game is running a business that puts the consumer at the heart of it. You just have to look across the ditch and see that businesses that don’t commit to high standards get mired in a whole range of bad outcomes.”