The new Conduct of Financial Institutions (CoFI) regime, starting on 31 March 2025, introduces rules that prohibit certain types of incentives. These changes primarily affect banks, non-bank deposit takers (NBDTs), and insurance companies. However, financial advice providers (FAPs) that act as financial intermediaries for these institutions will also be subject to CoFI’s incentive rules.

Who is affected?

Intermediated distribution includes mortgage and insurance advisers, motor vehicle dealers selling finance and insurance, retail stores offering add-on insurance products, and employers providing group insurance schemes for their employees.

Who do the rules apply to?

The incentive rules only apply to retail clients. This is based on what the Financial Markets Authority (FMA) calls the ‘consumer’ test. CoFI applies if a client enters into an insurance contract or a bank/NBDT lending contract for personal, domestic, or household purposes. Businesses borrowing money or purchasing insurance for business purposes are not considered consumers and are not affected by these rules.

However, if a business provides a group insurance scheme for its employees, the scheme is considered a ‘consumer.’ This means that any incentive payments received by the FAP from the insurer for their role in the group scheme will be subject to the incentive prohibitions.

What is a prohibited incentive?

A prohibited incentive is any payment calculated directly based on a target or threshold related to the volume or value of services or products. However, this only applies to retail consumers.

Banks, insurance companies, and NBDTs (financial institutions) cannot pay an intermediary (FAP), and a FAP cannot pay its advisers, a ‘prohibited incentive.’

What incentives are allowed?

The good news is that commissions are still allowed. A FAP can pay its advisers a commission if it is calculated on a ‘linear basis.’ A linear structure means a fixed commission percentage is paid on all sales. For example, a mortgage adviser may receive a flat commission of 30% of all commission the adviser generates for the FAP.

It is also allowed to have one direct reference to a target or threshold related to the volume or value of relevant services or products.

How to structure compliant incentives

When designing incentives, they should encourage more than just sales or revenue. You must be able to demonstrate how they drive the right behaviours. A good approach is using a matrix system where an adviser must meet key performance requirements, such as:

• Meeting all compliance standards.
• Having a meaningful professional development plan and completing Continuing Professional Development (CPD) requirements.
• Meeting service standards (e.g., responding to clients and providing advice within required timeframes).
• Providing high-quality advice suitable for clients.
• Completing client reviews within the prescribed timeframe.
• Achieving required client satisfaction survey levels.
• Meeting expected client retention and revenue growth figures as part of their base remuneration.

An adviser would only be eligible for an incentive if they exceed all these key performance requirements. If an adviser generates high revenue but does not meet these criteria, they would not qualify for an incentive.

If an adviser meets all the criteria, an incentive can be paid on a linear basis. For example, a fixed percentage of additional revenue generated. However, tiered incentives are not allowed. For instance, you cannot structure incentives as follows:

• 10% incentive on revenue up to $500,000.
• 20% incentive on revenue between $500,001 and $750,000.
• 30% incentive on revenue above $750,000.

Need help?

For more guidance and assistance with reviewing your incentive structures, contact the team at Strategi.