It has been working on a project examining life insurance churn since 2016, in which it selected 24 advisers identified as having high levels of replacement business, and investigated them more closely.

Four have been given private warnings.

The FMA found that half the advisers it talked to were either not aware of their obligation under the Financial Advisers Act to exercise care, diligence and skill, or they were in breach of it.

Advisers were poor at keeping records for the benefit of clients and most of the advisers failed to recognise that insurers’ incentives to sell products created a conflict with the interests of their clients.

The FMA said it was worried that advisers were earning up to 230% commission for placing new business and qualifying for overseas trips – if clients were being moved unnecessarily, it could put them in a vulnerable position.

“The failure to exercise care, diligence and skill for their clients was a consistent finding in our review of 24 advisers. Among the 24 advisers who were subjects of this round of inquiries, it was both striking and concerning that many of them did not even recognise that conflicts of interests can arise from incentives and commission,” said FMA director of regulation Liam Mason.

He said the results were unexpected. “It’s hard to manage a conflict of interest if you don’t know it’s there.”

In one case, a clear peak in sales was shown before the qualifying cut-off for overseas trips.   “Incentives are put in place because they work,” Mason said.

He said insurance had an unusually high upfront commission model.

“That’s something that providers put in place and we see advisers respond to. One of the things we’d like to see is the providers themselves taking a lot at the model and whether there’s a way to reward good advice and not necessarily a model that’s quite so much about rewarding changing policies.”

He said the balance of incentives would change under the new financial advice laws coming into effect with the Financial Services Legislation Amendment Bill. RFAs will find an obligation to put client interests first could make some situations hard to manage, he said.

“That will at least encourage reflection and examination of the model in play and we hope will be enough to create change.”

A review of the insurance contract law would also be another opportunity to look at insurer conduct, he said. “Whether there’s a case for different regulation of the providers themselves.”

He said most of the advisers were RFAs and it was the first time many had had contact with the FMA, so warnings and a report were the most proportionate response.

Mason said the FMA wanted to point out this was not a representative sample of all advisers. “We are not saying this is what insurance advisers are like but there’s enough commonality to think there are things here for all advisers to look at.”

A purpose of the report was to put advisers on notice that the FMA was going continue to look at this area. “There’s nothing here that has made us more comfortable.”

The FMA also issued compliance letters to six registered financial advisers and one authorised financial adviser. Inquiries into three authorised financial advisers remain ongoing. Two registered financial advisers are also subject to ongoing inquiries for other conduct reasons unrelated to the replacement business review.

It is also conducting work on replacement sales processes in QFEs.

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