10 May 2019

Presentation by Liam Mason at the IFSO Conference 2019

Where to from here – FMA-RBNZ report on life insurer conduct and culture, 9 May 2019


The FMA was established about 8 years ago, to be the first conduct regulator of New Zealand’s financial markets.  Our principal legislation is the Financial Markets Conduct Act.  It’s no surprise then that conduct is our main priority - it’s what we’re here for.

Conduct and culture are critical topics for financial services. To appreciate this, we only need to look at what has happened abroad, the mis-selling of payment protection insurance in the UK, the sales-reward driven misconduct at Wells Fargo in the United States, to closer to home, all the cases we’ve seen emerge in the Australian Royal Commission.

Our focus is on conduct and culture because what matters the most is how people within our financial services firms actually behave – how their actions affect New Zealanders and serve to promote confident participation in financial services by New Zealanders.

We think a simple way to test whether the culture of your firm and the conduct of your people are likely to promote such confidence is found in the answer to whether you put the customer – the real customer – at the heart of what you do.

Where this doesn’t happen, there is the real risk of poor conduct that will damage confidence – and damage real people too.  We see it emerge in the form of poorly designed products, unsuitable sales, poor advice, unmanaged (or unmanageable) conflicts, and, in insurance, in a poor claims experience.

Some recent history:

The FMA has been raising concerns about issues within the life insurance sector for a number of years. In recent years we have published two reports on replacement business involving financial advisers and one involving replacement business at QFEs. We have also highlighted concerns around soft commissions.

We’re not the only ones that have been talking about these topics.

In Australia, off the back of nearly a decade of scandals concerning financial advice, the Trowbridge report in 2015 set out proposals for extensive reform for the life insurance and financial advice sectors. This was followed by reforms to the laws and regulatory settings for life insurance commissions in Australia.

At around the same time, here in New Zealand issues were being canvassed within the industry, including in reports by Melville Jessop Weaver for the FSC and by NZIER for Sovereign.

Our conduct guide, published at the start of 2017, was about focussing on the customer, and what’s required within an organisation to make that happen.

Last year, though, the issues around the Australian Royal Commission emerged and put a spotlight on the financial services industry like never before.

It was these events over the Tasman that acted as the catalyst for our Conduct and Culture work

After seven rounds of public hearings over 68 days, more than 130 witnesses and review of over 10,000 public submissions, Commissioner Haynes came up with 76 recommendations.

Many of the specific recommendations are relevant to financial services businesses in New Zealand.  I’m not going to go through them in detail today, but I’d urge every firm to take a look at these.

The overarching themes that run through the report clearly are definitely relevant to our financial services industry and to New Zealand consumers.

A good starting point is the four observations that the Commissioner makes at the beginning of his final report: 

There is a strong connection between conduct and reward

    • When individuals are rewarded for behaviour that is not in customers’ interests, that behaviour is likely to follow…

There is an asymmetry of information/power between consumers and providers

    • Or as the Commissioner put it, firms and individuals acted the ways they did because they could. Their consumers have less understanding and next to no power to negotiate.

Many problems can be traced to conflicts associated with intermediation

    • In many cases examined by the Commission, intermediaries acted solely in the interests of product providers, or themselves, not in the interests of their customers.

Entities must be held to account

    • Here the Commission’s criticism turned to those who regulate and enforce the law.  He said the law should be as simple and clear as possible, and those who break the law should compensate those harmed and must also be held to account.

The core message that the Royal Commission report has for the financial services industry also applies here in New Zealand – that primary responsibility for misconduct lies with the entities concerned, which requires a close look at the culture, governance, and remuneration of financial services firms.

Refreshingly, from my perspective, the Royal Commission did not call for detailed new rules to curb the mischief.  Instead, the Commissioner highlighted six norms that should underpin conduct:

    • obey the law
    • do not mislead
    • act fairly
    • provide services that are fit for purpose
    • deliver services with reasonable care and skill
    • when acting for another, act in the best interests of that other

I’m not the first to say that these are simply stated, but for some firms, may pose quite a challenge in the execution.

What has been noticeable to me, and has been disappointing, is how many life insurers in New Zealand, and their senior management, have regarded the ARC as being just about banking, or just about Australia, and having nothing to do with them.

We know that the same sales channels and incentives practices that were dissected in testimony before the Royal Commission have been present in some business models of New Zealand firms.  These include soft commissions, high target-based sales incentives, and high-pressure sales.

We know that our industry also needs to grapple with the production and sale of low-value products, which pose particular risks because of the very narrow circumstances in which they make sense for customers.

We strongly believe, in both our banking and insurance industries, that complacency is dangerous – that a misplaced sense that these problems are not our problems, is a sure fire way to ensure that they become just that – to the detriment of our markets, our firms, and our people.

In the last week, the FMA and the RBNZ have issued guidance to insurers, setting out the recommendations from the ARC that we think they need to consider as they prepare their gap analysis for us by the end of June. But we also expressed again, the sense that insurers should know their business and its risks better than anyone else. They are the best positioned to determine and explain what is relevant from the findings of the ARC to their business.

So back in New Zealand what did we find?

Our review, which we undertook with the Reserve Bank, aimed to assess whether or not widespread conduct and culture issues existed in New Zealand life insurers. It looked at conduct and culture maturity in key areas such as customer outcomes, governance, risk management and issue identification and remediation.

It was a major undertaking for both institutions, as it was, we know, for the firms involved – with almost 300 life insurer staff interviewed, including directors, managers, and frontline staff.

It was with the frontline staff that we found the good news: there was a genuinely good customer focus in frontline claims teams, complaints handling teams, and some call centres – many of the staff that we spoke to appeared to have a strong desire to ‘do right’ by customers.

But this customer focus was not always reflected across the organisations as a whole.

If I were to sum up one of the core problems that we found, I’d say it was a lack of looking…

In particular, the review told us that the conduct issues we had been highlighting had seen little sustained response at management and board level. There was a lack of leadership in conduct and culture – the tone from the top was missing.

For the most part, we found life insurers have not to date been asking questions about conduct within their firms.  Boards were not been demanding the sort of information that will inform them about customer outcomes and treatment.

We saw very limited evidence that firms had spent time looking at our conduct guide, or were assessing their businesses against the themes and issues that had emerged from the Australian Royal Commission.

It was hard to see a clear institutional focus on serving the customer – what evidence we saw was at a frontline level, rather than higher up the organisation.

This was exacerbated in many insurers by the use of intermediaries and confusion over who their customer is – the end-purchaser or the adviser who sells for them.

There was, in general, a lack of oversight of advisers and intermediaries.

Most importantly, there was an unwillingness to accept responsibility for what is being done in the insurer’s name and with the insurer’s products.  We accept entirely that this is a joint responsibility, shared between advisers and insurers, but to be clear, it is the insurer that is ultimately accountable for customer outcomes with its products.

And what we found in our review that not enough is being asked to let insurers gauge the standards of conduct occurring in their names.

Complaints: an unmined resource

Another area where not enough is being asked is complaints.  One of my colleagues at the Reserve Bank described complaints as an un-mined resource, I think this describes exactly what we found.

Complaints are one of the great unmined resources for an organisation. In many cases, we saw it was complaints that were highlighting issues to insurers, not their own monitoring processes.

But we found that most life insurers’ processes and systems for customer complaints suffered from under-investment, and were often poorly embedded and inconsistently used.

That is why we say insurers need appropriate systems and processes in place to record and resolve them. A key question should be:  what is a complaint – firms should define clearly what is a complaint - and training staff on how to recognise a complaint – preferably not by use of specific terms, but from an assessment of what is being expressed by the customer.

We saw cases where insurers regarded a low number of complaints as an indicator of good conduct, meaning that culturally the incentive in the firm was avoiding recording a “complaint”, often meaning a chance to learn and improve is missed.

This is an area where I think we need to be incredibly careful with the messages we send to frontline staff – firms and regulators alike.  Collecting information on complaints must have as its first priority to learn from what has happened and to prevent future problems – not as an indicator of performance in itself.  I know that complaint numbers is a piece of basic data that boards and regulators tend to ask for.  We need to take care with the unintended consequences of these requests.

There was another area where we saw the dangers of unintended consequences – where staff was empowered and encouraged to resolve complaints at the front lines, which is a very positive thing – but then were not recording these as complaints, again meaning that opportunities to uncover broader issues were missed.

The real value of complaints is going to be realised only through careful analysis of the root causes– the product design, system, or conduct issues that led to the symptoms complained about.  This needs to be combined with a willingness to invest in fixing those root causes, not merely addressing symptoms.

We found that some life insurers were relying on these complaints as indicators of conduct, despite the incomplete picture they were getting. This is a start, but as a sole source of information, complaints can only tell you what has already gone wrong.  They are a lag indicator.

So while they are an excellent resource, they do not tackle the problem of how to prevent issues arising before the complaints roll in, before something has actually gone wrong.

We’ve encouraged boards to think more about what lead indicators they can find that will give them insights into how customers are being treated and what outcomes they’re experiencing:

    • Who is buying the product compared to who it was designed for?
    • What products are performing differently than expected – which are more profitable than expected, as well as less?
    • Where are you getting high premium income relative to amounts paid or payable under claims?
    • Where are declinature rates unusually high?
    • What reasons are coming through non-renewal or cancellation of policies by customers?

Where it matters…

One area where the lack of monitoring of outcomes was particularly concerning was in what we described as poor-value products, such as:

    • Accidental death cover
    • Specified injury cover
    • Funeral cover
    • ‘guaranteed acceptance’ products
    • Loan or credit card repayment protection insurance (payment protection).

What concerns us about products in these categories is the very slim circumstances in which they are likely to be of real value to consumers.  We see this from the performance of the products, whether in terms of loss ratio or declinature rates. (Note: Declinature is where an insurer or reinsurer refuses to offer terms of cover)

We also saw clear evidence of poor outcomes for customers from some of these products.  Of concern, we see some are being sold to customers without their understanding of the limitations.

A line we heard from some insurers was “some insurance is better than no insurance”. When it comes to some of these products, we simply do not believe this position is always valid.

Other particular areas of concern were the examples of potential misconduct that we found - ie: breaches of the law.

These included:

    • The selling to foreign customers who were ineligible for cover as they were not New Zealand residents.
    • Sending out information to customers the insurer knew was incorrect.
    • A system error that resulted in an excessive inflation increase of up to 30 times, with matching increases in the premiums. When discovered, the insurer did not proactively contact customers, and three years on remediation had not been completed for just under half of the customers involved

To be clear, there are issues here that need to be addressed, and the cases of potential misconduct identified in the report remain subject to investigation by the FMA.

Post review:

Now, while the findings of the joint RBNZ/FMA exercise present fairly dire reading, I think there is room for encouragement in where we go from here.

Firstly, the response from insurers and with the industry more broadly has been constructive.  Following the publication of the joint report into life insurance, Richard Klipin, CEO of the Financial Services Council, wrote in an article in Good Returns:

We need to address the key governance, process and remuneration issues and work with Government and regulators to do so effectively.   The onus is now on us as an industry to respond in a constructive and useful way.  Whatever happens next, it is clear where we land must have conduct, culture and the best consumer outcomes at its heart.  This is the new normal and we ignore it  as an industry at our peril.”

In recent weeks, I, others at the FMA, and colleagues at the RBNZ, have been engaging with the boards and Chief Executives of all the life insurers who took part in the conduct and culture review, in workshops and at board meetings.  We have had frank and open conversations, and I think that many see, as we do, that we have an opportunity in New Zealand to address the issues that we’ve uncovered before they lead to incidents that erode public confidence in the industry – before we find ourselves where Australia is today.

I’m encouraged by this.

We know that some of the expectations that we’ve set out are challenging – that in some cases they require examination of established business models. 

We are looking for insurers to transform the way they approach conduct risk and achieve a customer-focused future.  This is the time to think and act beyond the minimum requirements.

The action plans being prepared for us by the end of June require full board ownership. Beyond that, boards and senior management must take ownership of customer outcomes, embed conduct and culture in their strategy, and embed a ‘no-blame, speak up’ culture that encourages staff to report conduct issues.

Most of all, they need to not wait. Learn from and get ahead of issues that have emerged in Australia.

For example, new products should be designed to deliver good customer outcomes, while old products should be reviewed to ensure they remain relevant and deliver good customer outcomes. Customers should be proactively encouraged to consider whether their product remains suitable.

All incentive programmes, both internal and external, should be reviewed.

Public expectations of financial services providers have shifted. Good customer outcomes have got to be front and centre.

What about reform?

The conduct and culture review also identified gaps that we saw in the regulatory framework.  Last month the government published an options paper aimed at addressing these.

The options paper proposes a suite of new measures, with the broader aims of putting customers at the heart of decision making and making good outcomes the bottom line.

It includes a ban on target-based remuneration and incentives, new legal duties on financial institutions and requirements that products sold to consumers are fit for purpose and sold to the right people

The paper also set out new enforcement tools so that if the new rules aren’t met, providers face appropriate consequences.

I would encourage everyone to read the options paper in full, consider it, and then whatever your view, make a submission, so that your views can be heard.  

My overriding message, though, is please do not think that waiting for reform is the right thing to do now.  We’ve asked insurers to give us their plans to address the concerns that we have set out, both in our report and in the individual feedback that we’ve given each company.  Responses are due at the end of June. These will be reviewed, in a similar process to the way that our teams are currently reviewing bank responses.

Further action will be taken if we do not feel there has been enough progress or urgency in addressing the issues of concern.  We’ll also plan ongoing engagement to allow us to monitor progress with the plans put forward and to carry on the conversation with firms as they address these challenges.

And as I mentioned earlier, inquiries into the potential misconduct identified in the life insurance sector remains ongoing…

Period of change – for us, and for the industry:

So, coming back to the theme of today’s conference, the period coming up is one of change. Change for all of us - for the industry, for the regulator, and we expect, for consumers also. There will be challenges for you, adapting to new laws on financial advice, to the expectations we have set for you, and however, the government decides to tackle the gaps in the regulatory framework. There will be challenges for us, as we take on the regulation of all financial advisers, and our role in any new framework.

But we are all here because we care about financial services.  The decisions we all make to protect our health, our wealth and our financial security through insurance are among the most important decisions we need to take in our lives.  We can agree on the important role that insurance plays in people’s lives.  I’m confident we all want New Zealanders to trust and be proud of the institutions that serve them. But to do that, both financial services firms and regulators need to earn that trust, and keep it.

Thank you for your time and I look forward to any questions you may have.