In a submission to the Ministry of Business, Innovation and Employment on its Financial Advisers Act review options paper, the RBNZ said commission was appropriate, provided the interests of the clients were considered and the structures did not threaten the viability of companies offering them.

But it said there had been anecdotal reference over a long period of time to the fact that New Zealand advisers were earning high commissions compared to other countries.

“High commission rates may result in higher premium rates as insurers pass on costs. This, in turn, lowers the proportion of the premium returned as claims and erodes the efficiency of the insurance sector in providing the general public with risk reduction services,” RBNZ said.

“Alternatively, insurers may choose to absorb the costs of high commission rates, reducing their profitability and eroding their solvency position. Under the RBNZ solvency standards, capital may effectively be required to be set aside against the risk that policies will terminate early and that commission costs already incurred will not be recovered. High commission rates increase the amount of such capital that life insurers must hold, decreasing their solvency margins and ratios, and making the insurance sector less sound than it otherwise may be."

The RBNZ said high commission rates presented an elevated barrier to new entrants and to the efficiency of the sector.

It said it was also concerned that high upfront commissions meant value for advisers was maximised by cancelling contracts every couple of years and replacing them.

This would weaken insurers' balance sheets and the sector would become less sound if the churn levels were not priced into products, RBNZ said. The sector would become less efficient and premium rates would be higher than they otherwise would be.

“The bank is supportive of measures to lower commission levels by improving the functioning of the market.”

RBNZ said there should be better alignment of the timing of commissions and incentives to advisers to provide ongoing service. There should also be mechanisms for customers to seek redress for inappropriate sales.

It said it would support ending volume-based commissions and improving the quality of soft-dollar remuneration.

Industry commentator David Whyte said it was surprising that the RBNZ had taken a side on the commission debate.

“Commission restrictions discriminate against cost-efficient life companies which have effective expense controls relative to their chosen business mode.

“The free market should be allowed to find the level of pricing – including all expenses – which the consumer is prepared to meet. I would have thought the RBNZ would have preferred to remain neutral and treat all licensees with equanimity.”