MJW Report - A roundup

Now that two weeks have passed since the MJW Report was released, we thought we’d put together an overview of the aftermath. For those not in New Zealand, or not directly following the conversation across the internet, here’s what you should know:

The main voices

The FSC

The report was commissioned by the Financial Services Council (FSC) to “investigate sales incentives in the personal insurance industry (life and income protection insurance) and to suggest remedies for any misalignment of incentives between salespeople and their clients.” (Source)

FSC CEO Peter Neilson said the goal was to have recommendations available for addressing these issues “by the time we submit on the Financial Advisers Act Review proposals later this year.”

The aim was to produce a report that could be embraced by the industry said Neilson “The FSC and its members want solutions that can receive wide buy in from consumers, producers, agents and brokers.”

After the report was released, a number of FSC members (AIA, Asteron Life, Partners Life, Fidelity Life) left the group in a wave of discontent. The FSC is yet to make any public statements addressing the discontent, but it is known the group as a whole rejected Partners Life’s suggestion of a lengthy disclaimer to be published with the report claiming it was outside of the original scope of the commission.

MJW

Consulting actuaries Melville Jessup Weaver were commissioned by the FSC to produce the report, with Mark Weaver and David Chamberlain as the authors. Suggestions have been made, particularly within the disclaimer proposed by Partners Life, that the initial idea for the report came from MJW, with the FSC accepting the idea.

To date, no public statements have been made by MJW in response to the backlash against the report.

MBIE and the Minister

One of the primary motivations behind the report was to help inform the FSC’s submission on the Financial Advisers Act Review, but both the Commerce Minister, and MBIE have been careful to remain neutral, if not actively removing themselves.

Cameron Gray, spokesman for the Commerce Minister Paul Goldsmith said: "Given the likely high level of crossover between the options paper and the MJW report, it would not be appropriate for the minister to comment on the report while he is seeking public feedback on the FAA review."

A Ministry of Business, Innovation and Employment spokesperson also commented: “Banning or restricting commissions is not MBIE’s current preferred option. However, we are seeking feedback on the effectiveness and impacts of this versus other options to manage conflicts of interest. Other options include an ethical obligation to put the consumer’s interest first, together with clearer and more consistent disclosure of conflicted remuneration.”

Dissenting industry opinions

The report has been so controversial within its own ranks that a number of former members left the FSC in response to the report being published as is. Those against the report include AIA, Asteron Life, Partners Life, Fidelity Life and the PAA.

Partners Life managing director Naomi Ballantyne has been open about Partners’ reason for leaving the council:

“During the consultation process it became very clear to Partners Life that the MJW team came to the meetings with a pronounced bias against independent advisers and rather than genuinely ‘consulting’ with the industry, were simply trying to ‘sell’ their opinion. Our experience of the process was that any opinion we expressed or evidence we provided to them that did not support their predetermined opinion was immediately dismissed. Partners Life was not the only FSC member company to have this experience, as a number of members shared similar experiences at FSC meetings,” she said.

Partners proposed a disclaimer stating the report’s views were not backed by the FSC, and outlining the issues during the commission process, including this quote:

“As the report does not fall within the scope agreed to by the FSC, nor does it demonstrate the level of impartiality and diligence that the FSC would expect of such a report, the FSC cannot and does not agree with or endorse the MJW report.”

The disclaimer was rejected by the FSC.

The recommendations

The reports main assertion is that life insurance in New Zealand is 10% to 15% more expensive than it should be because of advisers’ commissions, and that conflicts of interest cause poor outcomes for consumers.

In light of this, it makes a few key recommendations:

  • The removal of registered financial adviser designation so advisers are only authorised financial advisers, or qualifying financial entity (QFE) advisers.
  • AFAs should be able to access products across the market.
  • QFEs need to make it clear they are pushing their provider’s products.
  • Advisers would have to disclose their actual remuneration to their clients and tell them what their policies would cost without it. This would be part of a simplified disclosure process.
  • A new remuneration model would see advisers paid 50% commission upfront, instead of up to 200%, and 20% servicing commission, up from about 7.5%.
  • The maximum upfront commission that could be paid is $3500.
  • If a client moved to a different adviser, they could take the trail commission with them.
  • No upfront commission would be payable if a policy was replaced within seven years unless the premiums increased.
  • Volume-based incentives would be banned, including overrides and soft commissions.

Click here for the full report.

Main critiques

One of the initial criticisms of the report is that it seemed tailored to support a preconceived conclusion: that commissions needed to be heavily regulated, and therefore missed the bigger picture.

PAA chief executive Rod Severn outlined how he believes this lead the report astray. “The Report is unbalanced in its assessment of two key themes – replacement business and conflict of interest. It did not address or fully qualify these issues in equal measure across all channels in the industry, but rather focused on the advice channel. This resulted in an unbalanced assessment and associated set of recommendations, and a central recommendation that is not in the best interest of consumers.”

The accusations against the MJW report include a number of other criticisms that support the opinion that the report was half-baked and under researched. Common issues raised were that MJW did not consult industry stakeholders, and repeatedly made claims supported by “minimal proof and faulty data.”

Another common refrain is that the report was biased towards banks and against insurers. AIA chief executive Natalie Cameron commented on this, “despite recent reports of conflicts of interest in the banking channels; these were entirely excluded from the report”.

Overall, it seems that most feel like an opportunity was missed, a sentiment summed up by Michael Naylor's opinion piece for Good Returns:

“Commissions are not the biggest issue in industry, but it is vital that industry comes to some agreed alternative to the current unsustainable levels. The biggest issue with this report is the missed opportunity to do that properly.”

There has not been much published in support of the report since its initial release, although many agree that this is a conversation that needs to happen. Many points made by the report have been largely agreed upon, but as asserted by Michael Naylor, some feel “the good parts of the report are common industry knowledge.”

Where to from here?

It’s difficult to say where the conversation around advisor regulation will go from here, but it is clear that the subject is far from closed. The industry will likely now turn its eyes to the FAA review, another platform that could support more discussion around the role of advisors, and how the insurance industry of New Zealand can best serve the consumers they set out to help.