Examples of intermediated distribution include mortgage or insurance advisers, motor vehicle dealers selling vehicle finance and insurance, retail stores selling add-on insurance products, and group insurance schemes held by employers for the benefit of their employees.

The incentive rules only apply to retail clients. This is what the FMA refers to as the ‘consumer’ test. CoFI will apply if a client enters into an insurance contract or bank/NBDT lending contract for personal, domestic or household purposes. Businesses which purchase insurance contracts or borrow money for business purposes are not treated as consumers and hence the incentive prohibitions do not apply.

However, if a business provides a group insurance scheme to its employees, then the group insurance scheme is treated as a ‘consumer’. This means that any incentive payments received by the FAP from the insurer for the FAP’s involvement in the group scheme would be caught within the scope of the incentive prohibitions.

Banks, insurance companies and NBDTs (financial institutions) cannot pay an intermediary (FAP) and a FAP cannot pay its advisers a ‘prohibited incentive’. A prohibited incentive is one which is calculated in any way by a direct reference to a target or other threshold that relates to the volume or value of the services or products. However, this only applies when the products or services are for retail ‘consumers’. 

The good news is that commissions have not been prohibited. A FAP can pay its advisers a commission with an incentive provided it is calculated on a ‘linear basis’. A linear structure is where a fixed commission percentage is paid for all sales. An example could be a mortgage adviser is paid a flat commission of 30% of all commission the adviser generates for the FAP.

It is also permissible to have one direct reference to a target or other threshold that relates to the volume or value of the relevant services or associated products.

Making changes to remuneration structures takes time and these need to be discussed with affected staff. With less than 12 months remaining, we recommend you start discussions with advisers on how your future incentives will work. When designing incentives, ensure they incentivise more than just sales/revenue. The incentive needs to drive the right behaviours and you will need to be a position to show how this occurs.

Contact the team at Strategi for more guidance and assistance with reviewing your incentive structures.