Damning report seals case for greater regulation of the finance sector

Tuesday, 29 January 2019

OPINION: For anyone who believes the finance sector is geared against regular customers, a major report in the life insurance sector was grist to the mill.

As well as highlighting a major lack of oversight (meaning directors of insurance companies often did not know what might be going on in the company they govern), the Reserve Bank and Financial Markets Authority (FMA) uncovered multiple examples of what appears to be outright misconduct.

The regulators appeared to be writing a script for why additional legal powers were needed to address what they see as a gap in their powers over the sector, with neither the FMA or the Reserve Bank having explicit responsibility for policing conduct and culture in the sector.

The Government immediately took the bait and announced that it would fast track additional customer protection powers in the financial sector.

**READ MORE:

* Government to fast-track laws to protect customers from banks and insurers

* 'Complacent' life insurers aren't giving customers good value

* Banks given deadline to end high-pressure sales incentives**

This was political theatre, but was less of a knee-jerk reaction than it might seem; a report on the banking sector released in late 2018 pointed to conduct issues there too.

As well as having several months to address the issue, Finance Minister Grant Robertson also said the problems in insurance were that much worse than in banking.

New Zealand's life insurers are unlikely to mount a case against greater powers for the regulators.

Given the specific cases outlined in Tuesday's report, they should count themselves lucky not to be publicly shamed for failings, or even in some cases prosecuted, at least not yet.

Although the report claimed that misconduct was not widespread, some of the examples were alarming.

One company was found to have been selling life insurance products to foreigners, who could never possibly claim it because the insurance was only available to New Zealand residents.

In another case, customers were significantly overcharged premiums, but the company was waiting for them to discover the problem and complain before returning the money.

Mailouts from another insurer contained information which the insurer knew was incorrect for some customers. Not only did the insurer not contact the affected customers to warn them that they may have been misled, it had done nothing to ensure that future correspondence was not also incorrect.

Although the report does not reveal exactly what the incorrect information was, it was clearly not trivial. 'Evidence provided suggested that the insurer … has declined claims from affected customers on the basis that they were not eligible.'

It may be worth stating the obvious to make clear how serious this is. Tuesday's report is not about all types of insurance, it is about life insurance only.

Where the FMA and Reserve Bank are describing policyholders having their claims rejected, these are not examples of people being turned down by insurers because their car broke down due to 'fair wear and tear', or because they failed to file a police report when they lost their wallet while on holiday.

A rejected claim by a life insurance company tends to mean a spouse or family is being left in much more vulnerable circumstances than the deceased policyholder believed they would be.

The message released on Tuesday was not new.

Previous reports from the FMA have warned of possible misconduct in insurance sales as well as the risks created by incentive structures which reward people based on the volume of sales rather than how suitable the products being sold to customers were.

The same message was delivered in the latest report, as well as claiming that the commissions paid on insurance in New Zealand were among the highest in the world. Ultimately those commissions are paid by consumers.

It also warned that not only were there signs of high levels of policies being declined (that is, the company refused to pay), that this information was not being passed to the boards of the companies involved.

Not only was the sector not living up to the standards expected by regulators, New Zealand's insurance sector was shown to not be living up to the standards it was claiming to adhere to.

In September 2018, as the regulators were conducting the investigation of the sector, the Financial Services Council (whose members include the majority of New Zealand's life insurance companies) released a code of conduct to promote good conduct and a strong customer-focused culture amongst its members.

However the FMA and Reserve Bank 'saw little evidence of them analysing whether their conduct risk systems and processes would be compliant' with the code by the start of January.

After the report into the banking sector was released in November it was held up both as a sign of some problems, but as justification that for New Zealand not conducting a full probe like the Royal Commission which was held across the Tasman.

Had had the life insurance report been made public at the same time as the banking report, the findings may have prompted calls for executives to be hauled before Parliament to explain themselves.​