Australia’s recently-released Financial System Inquiry report has suggested that upfront commissions be regulated so they are not more than trail commissions.

It said ensuring upfront commissions for life insurance advice are not greater than ongoing commissions would mean fewer incentives for churn and improved advice quality.

Australian commissions are lower than New Zealand’s – between 100% and 130% of first year insurance premiums, compared to over 200% in some cases in New Zealand.

Trail commissions in Australia are between 10% and 13% per year.

Partners Life pays some of the higher upfront commissions in the New Zealand market but Ballantyne said commission structure was not the problem. “It’s the company taking the risk, not the client.”

She said there should be a process for advisers to follow when they were dealing with replacement business.

As it is at the moment, the “carrot” of upfront commission enticed advisers to move clients who had policies with other companies. “They don’t have to do a lot of work to justify that and there’s a risk to the client. We should fix the process for repeat business.”

Ballantyne said the system should be tougher for advisers placing repeat business because they did not have to convince the client that they needed insurance – just that a different policy would be better.

“The work is only to ensure the client is better off with a new policy and is aware of the risks and opportunities to make that decision We need a process that has to be followed to demonstrate that the client understands the policy that’s being replaced the client given full and frank disclosure about what they stand to gain and lose. If do that the commission is appropriate.”

She said removing upfront commissions would significantly reduce the amount of insurance distributed in New Zealand, because people were sold insurance rather than buying it. “Clients do not think they need the product.”

If it became uneconomic for advisers to operate there would be a much bigger underinsurance problem, Ballantyne said. “Upfront commission is not the issue provided the process around advice is robust.”