Who should be made to comply?

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There is plenty of talk about advice-level compliance, and to be fair there is quite a lot of regulation of product providers (which we shall turn to later) but most of the law and regulation is about the adviser.

Monday, November 28th 2011, 12:11PM 1 Comment

by Russell Hutchinson

Contrast this with the vehicle sales business. There are stringent safety regulations for all vehicles , standards for petrol, sometimes engine efficiency (see California) and frequent re-checks.

If the approach to insurance regulation was taken by the vehicle industry you could pretty much buy a car as dangerous as you like provided the adviser gives you a proper disclosure statement while selling it.

Of course, the penalties for having no insufficient tread on your tyres can be somewhat more immediate and dire than the penalties for having rubbish insurance. But there is a similarity – the life you save many not be your own. The fortunes of your children may depend heavily on the opportunities they enjoy during their formative years. You may choose to maximise spending over protection, in which case, so be it. But if you choose to protect them and find the insurance fails: that is another story.

But in the insurance industry, the compliance impact on the product is quite distant from the consumer. It tends to centre on prudential regulation and management of the insurer, rather than any tough rules on the product.

At the product level the nearest we have seen regulation come is a Commerce Commission guidance note on the scale of commission permissible on insurance tied to consumer credit.

I would rather not see a bunch of fussy prescriptive rules about the nature of cover. I dislike the banning of insurance from KiwiSaver as much as I would dislike its mandatory inclusion. But there are some tools insurers could deploy to immediately reduce the risk from compliance. One of those tools is a recommendation for a foundation cover which will provide some payment across a broad spectrum of risks – a baseline from which the consumer and adviser must opt-out. That would reduce a lot of complaints that come from clients saying "I thought it covered..."

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