Regulating incentives under the Financial Markets Conduct Act – Is this the end of commission incentives in financial markets
The Financial Markets (Conduct of Institutions) Amendment Bill (the “Bill”) is currently working its way through Parliament. The purpose of the Bill (among other things) is to address an issue in financial markets where remuneration like commission incentives provided for the sale of financial products and services is driving poor outcomes for consumers.
The Bill proposes a number of changes however the key change for employees is that, if enacted, the Governor General will have the power to regulate incentives paid to those involved in the sale of financial services or financial products. This could mean for some employees (and others involved in the provision of financial products or services) their current remuneration or commission structure could become unlawful.
The changes will affect financial institutions and intermediaries (both defined in the Bill) – the key point for employers and employees is an “intermediary” includes a person ‘involved in the provision of a relevant service’, meaning (among other things) they:
- negotiate, solicit, or procure contracts for relevant services;
- carry out other preparatory services for entering into those contracts; or
- give regulated financial advice in relation to the products.
This will capture a large number of employers and their employees in this industry, particularly those selling consumer finance or insurance, whether they sell their own product/service or the product/service of a third party.
The current status of the law
Currently, at the time of writing (September 2021) there are no regulations on these incentives – the Bill is at its second reading in Parliament and has not come into force, neither has the Ministry of Business, Innovation & Employment (“MBIE”) decided how it will regulate these incentives should the Bill be enacted. MBIE has however issued a discussion paper and set out a preferred option which provides some idea of the most likely outcome – what we can expect – if the Bill is enacted.
In the writer’s opinion it is premature for organisations to be enforcing (but perhaps not premature to be discussing) changes when at this stage nothing has been confirmed, neither have the regulations been made clear – any changes made now are based only on speculation as to what the law might look like. However, some forward looking employers have implemented, or begun the process of implementing, changes in light of the most likely outcome or simply to resolve on their own account the issues identified in the marketplace.
What changes are expected?
The Bill has wide powers for allowing the regulation of commission incentives in financial markets. The Bill defines ‘incentive’ broadly and includes ‘linear incentives’ (a linear incentive is one not linked to a target – for example, they are the same for each product sold, or a percentage of each product sold where the percentage does not change).
However, MBIE’s preferred option is not to regulate to the full extent allowed for under the Bill – it has suggested limiting regulation to only incentives linked to sales volume or value targets. It does not propose to regulate linear incentives, salary, performance benefits that are not linked to sales targets, or disincentives (which the discussion paper recognises are already problematic).
The discussion paper helpfully provides a number of examples of incentives that might be prohibited by the regulations under the preferred option:
a) “an adviser is entitled to a monetary bonus for placing $5 million worth of life insurance policies (monetary incentive, individual)
b) an all-expenses paid holiday is offered to a salesperson or adviser for selling 30 of a specific mortgage product (soft incentive, individual)
c) a manager of a team is entitled to a paid holiday if their team sells a certain number of life insurance policies (soft incentive, team)
d) a salesperson is offered a cash bonus for increasing their own personal sales by ten per cent compared to the previous year (monetary incentive)
e) people who sell 10 of a specific type of life insurance policy go in the draw to win a $2,000 bonus (monetary incentive, inducement)
f) a $1,000 bonus is offered to an individual that refers 100 customers to an insurance adviser in a quarter (monetary incentive, referral)
g) a mortgage broker is eligible to receive an incentive of 0.3 per cent of the value of mortgages sold in any month on the first $3 million of sales, and 0.4 per cent of the value of mortgages sold in any month above the first $3 million. Each sales value at which the rate of incentive increases is a target based on the value of the product (accelerator).”
MBIE prefers this option as it would address the most problematic incentives however still allow the industry to continue using linear incentives and including commission in remuneration structures.
What happens if changes are implemented which make my remuneration structure unlawful?
The short answer is for those in financial markets the commission incentives or structure needs to be changed to fit within the new regulations, whatever they may be – a failure to do so leaves the business open to legal action by a Labour Inspector.
An employee’s remuneration is a term of their employment – it is unlawful to change this unilaterally without their agreement. If an employee’s remuneration structure becomes unlawful they need to be consulted with, and agree, to any change. It may be justified to proceed with a particular change without the agreement of an employee where the same cannot be reached however this depends on the facts and context of any particular case – if an issue arises you should seek independent legal advice.
In the writer’s opinion it is not open for an employer to dismiss an employee because they refuse to agree to changes, even if those changes are required under the regulations. It may be tempting to jump to the conclusion that if an employee does not agree to changes then their employment cannot lawfully continue and they are redundant, however this is incorrect –whether a redundancy situation has arisen is an objective question of fact, the question being is there a sufficient difference between the two positions to break the essential continuity of employment. A change in remuneration is a change to the terms of employment rather than a change in position, and even if framed as a change in position the objective test must still be met – in the writers opinion, dependent on the facts and context of any particular case, a proposal to change the remuneration structure of an employee to meet new regulations, even if framed as a restructure, is almost certain not to meet the legal test.
The key take away for employers involved in financial markets is to be conscious of the changes to commission incentives and remuneration and be prepared by asking themselves – “will my business be captured by the new regulations and if so do we need to make changes to how staff are paid to ensure we are not breaching the law?”. For employees, the question is similar – “does my remuneration meet the requirements of the new legislation, and if not, are any changes my employer proposes substantively justified and carried out in a procedurally fair manner?”.
As specialist employment lawyers we can assist with advising on any changes that might be required and ensuring they are made in a lawful and procedurally fair way – we are happy to discuss with you how we can assist, whether you are an employer or an employee.