Finance providers warned

The Financial Markets Authority (FMA) has published a review of add-on insurance and extended warranties, highlighting the need for stronger oversight of sales and distribution channels to support fair consumer outcomes.

The report examines how insurers design, distribute and oversee products such as mechanical breakdown insurance, guaranteed asset-protection insurance, payment protection insurance and extended warranties. 

The FMA says while these products address relatively small and specialised markets, “they share common characteristics including complex features, significant exclusions and limitations, and distribution through highly intermediated sales channels”.

Michael Hewes, director of credit, deposit-taking, insurance and advice, says insurers cannot outsource the responsibility for fair consumer outcomes.

“When products are sold through intermediaries, insurers still need robust systems, controls and monitoring to ensure consumers are treated fairly,” adds Hewes, pictured. “We saw a recurring gap between the policies, processes, systems and controls insurers described, and how they operated in practice.

“New Zealanders should be supported to make informed decisions about the products they purchase, and have confidence those products are likely to meet their needs and objectives.”

The FMA says its review identified four key areas of concern. These are:

• Sales practices and distribution arrangements may not consistently support informed consumer decision-making.

• Consumers may purchase products that do not consistently meet their needs, objectives or expectations.

• Customers may buy products without fully understanding them.

• Insurers aren’t consistently identifying and responding to emerging conduct risks.

Distribution oversight is the area where “industry uplift is most needed”. Insurers described onboarding and training arrangements for intermediaries, but the review found limited evidence of monitoring and oversight proportionate to the risks associated with commission-based and intermediated sales models.

The review also found insurers could make better use of complaints, claims and product performance data to assess if products continue to deliver value and meet consumers’ needs and objectives.

Alongside opportunities for improvement, the review found insurers have taken steps to embed requirements of the Conduct of Financial Institutions regime, with some companies demonstrating mature approaches to product governance, complaints management, consumer communications and using product performance data to improve consumer outcomes.

The FMA has provided targeted feedback to participating insurers and expects the wider sector to consider the findings and assess whether similar issues exist within their own operations.

Key observations made

While insurers have introduced arrangements to support fair consumer treatment and outcomes, these are not always operating in ways that ensure consumers receive consistent fair treatment and outcomes in practice, says the FMA. 

Some insurers did demonstrate more “mature approaches”, but the regulator identified several common areas for improvement across the sector. These were:

• Sales practices and distribution arrangements may not consistently support informed consumer decision-making. 
The FMA identified examples of practices that may influence consumer decision-making or create pressure at the point of sale, and limited evidence of oversight and monitoring proportionate to the risks associated with intermediated and commission-based distribution models. Intermediated distribution emerged as the clearest area where industry uplift is required. 

• Consumers may buy products that do not consistently meet their requirements, objectives or expectations.
The report states: “We identified varying approaches to assessing product performance and consumer outcomes, including claims and loss ratios that raise questions about whether some products are meeting consumers’ requirements and expectations.” 

• Consumers may purchase products without fully understanding them.
While insurers generally relied on disclosures, documents, training and sales scripts, the FMA saw limited evidence that insurers consistently assess consumer understanding or product suitability. 

• Insurers are not consistently identifying and responding to emerging conduct risks.
Insurers collected information through complaints, product reviews, quality-assurance activities, claims experience and other sources, but it wasn’t always clear how these insights were analysed and translated into action.

The way forward

The FMA has provided targeted feedback to participating insurers, and expects insurers across the sector to consider the findings in its report and assess whether similar issues exist within their own operations. In particular, insurers should ensure:

• Products continue to meet the requirements and objectives of consumers (when viewed as a group).

• Consumers are supported to make informed decisions.

• Sales practices do not create unfair pressure or undue influence.

• Distribution arrangements are supported by robust oversight and monitoring proportionate to the risks involved. 

“We will continue to test insurers’ arrangements through our supervisory and monitoring activities, including how insurers have responded to the findings of this review and whether identified issues have been addressed,” says the FMA.

“We will also continue to monitor conduct risks associated with add-on insurance products and extended warranties as part of our broader conduct supervision programme. 

“When we identify conduct that’s inconsistent with legal obligations, we will consider the use of the FMA’s regulatory tools.”

Reviewing complaints 

The FMA says it observed evidence that some complaints are systematically analysed and used to inform product design, distribution practices or broader conduct risk management. 

In many cases, however, complaints data wasn’t clearly linked to product reviews or oversight activities, reducing insurers’ ability to identify trends and address underlying causes. This risk is amplified when complaint volumes are low, as firms may have limited visibility of emerging issues. 

The report states: “Overall, these gaps limit the effectiveness of complaints as a source of insight into consumer outcomes. This creates a risk that underlying issues are not identified or addressed in a timely manner, and that opportunities to improve products and practices are missed.” The FMA says insurers should consider whether: 

• Consumers can easily identify, access and use complaints channels when concerns arise.

• Complaints and other consumer feedback are consistently recognised, recorded and addressed.

• Complaints processes support fair and timely resolution of consumer concerns.

• Information obtained through complaints, claims and other consumer interactions is used to identify emerging risks and poor outcomes.

• Insights from consumer interactions are used to inform product reviews, distribution oversight, governance discussions and improvement activities. Click here to download the FMA’s report.