The Government agreed at Cabinet today to fast-track customer protection measures in the financial sector.
A report released today by the FMA and RBNZ highlighted major issues in the insurance sector impacting on consumers. This follows a report on banking conduct and culture released in December. The problems highlighted in both reports are similar, Commerce and Consumer Affairs Minister Kris Faafoi says, though more extensive in life insurance.
”There are gaps in the regulation of the sector that are exposing consumers and we are going to address them. We need a regime where banks and insurers are focused on good outcomes for the consumer and are not conflicted by sales rewards.
“The report has found New Zealand life insurance industry has a culture that prioritises sales over customer interests and customers deserve better. Cabinet today agreed we are going to get rid of sales incentives in the insurance industry that are driving behaviour that is not in the best interest of consumers.
“Incentives such as overseas trips and loaded upfront commissions can cause a conflict for the salesperson. We have also heard about insurance policies being sold to people who are ineligible for cover, premiums continuing to be charged for a policy that’s no longer in effect, and policyholders not being effectively notified of increases in premiums.
“This, with the findings from the earlier report on banking conduct and culture, mean that we have to take action. We plan to release a consultation paper on the changes by May and introduce legislation later this year,” Kris Faafoi says.
A comparison of life insurance commissions worldwide shows New Zealanders are paying a high rate of commissions – more than 20 percent of the cost of the premium. In comparison, consumers in Many European countries pay less than 10 percent, and in Australia just over 10 percent. Annual premiums paid by consumers for life insurance total $2.57 billion, with 4 million life insurance policies in New Zealand.
Minister of Finance Hon Grant Robertson says that while the industry has started to address issues raised in the reports it is clear that the Government needs to act on regulation and conduct of financial institutions, including banks.
“We want to see:
- 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 applied to both banking and insurance, since the issues identified in both are similar. There are also overlaps between the sectors, with banks often selling insurance products.
- A strong response to internal sales incentives and soft commissions.
“Because the issues identified with insurance and banking are similar, we will consider changes that apply across both sectors.
“Also, while this report focuses on life insurers, it’s possible the vulnerabilities it identifies may exist across the broader insurance industry.
“We will consult with the public and industry on these changes, but we are going to move as quickly as possible on this because New Zealanders need to have confidence their rights and interests are being protected."
Kris Faafoi says the consultation on these measures will run alongside work already underway to update insurance contract law.
“Current contract law is based on legislation that was written more than 100 years ago – and there are a number of improvements that need to be made. These include better disclosure protections for consumers, to address situations where insurers can completely avoid a policy when a policy holder does not disclose something – even if it was an unintentional non-disclosure or one unrelated to the claim a policy holder is making.
“It is an ambitious timeframe but my intent is to have both pieces of legislation in Parliament by mid-2020, because it is time to ensure consumers get protection that is clearly needed.”
The FMA is supplying individual feedback to the 16 life insurers reviewed, with a response and action plan on how they will address their issues due back to the FMA by June 2019.