RFAs to be allowed to sell investment-linked insurance

Registered Financial Advisers (RFAs) will now be able to sell investment-linked insurance products after a re-categorisation of the Financial Adviser Regulations 2011.

Thursday, June 23rd 2011, 5:00AM 42 Comments

by Benn Bathgate

Commerce Minister Simon Power has approved re-categorising certain financial products as category two "to better reflect the economic substance of the product."

Under the original regulations products involving an investment element were category one products and only able to be sold by Authorised Financial Advisers (AFAs).

A paper, from Cabinet's Economic Growth and Infrastructure Committee, says that while such products "technically fall within category one" they share significant traits with category two products.

"These products are considered lower risk. . . their inclusion in category one products may reduce consumer access to these products, as they will need to receive advice from an authorised rather than registered financial adviser."

The paper also argues category one inclusion increases compliance costs for advisers by requiring some who would not otherwise seek AFA status to do so.

"I therefore propose that the initial re-categorisation of this product be for a period of five years only, and its continuation be made subject to a review by the Ministry of Economic Development in conjunction with the FMA," Power said.

He added that while supporting the intent of the original regulation, "I recognise that the financial adviser regime is in its preliminary stages and that aspects of the regime remain unproven."

AIA New Zealand has said its Cash Back Life and Permanent Term products are to be reclassified, a change CEO Wayne Besant welcomed as "great news for us and reassuring for our advisers."

However, for Wealth Building Strategies managing director Michael Shaw, the re-categorisation is less welcome.

"I was never aware that within the financial advisers legislation that the Government could turn around and do this," he said.

He said the change "is a travesty and a kick in the guts for all those advisers who worked diligently to achieve AFA status."

Another issue for Shaw is whether in the wake of the changes, providers may lobby Government to allow other products to be sold by RFAs, a cheaper distribution channel.

"I think this is the tip of the iceberg. We have to question the wisdom of those in Cabinet who have now opened the floodgates to a plethora of applications from life companies to water down the provisions of the FAA 2008 and throw the way clear for RFAs to be allowed to operate in the AFA space."

He said the logic used to make this decision could in turn clear the way for certain KiwiSaver products to be re-categorised.

"What was the point spending all this time and money becoming an AFA if all these changes are going to occur and products going to be swapped from one to another?"

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz

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Comments from our readers

On 23 June 2011 at 9:36 am Gecko said:
Mike, you're spot on!
This move amongst others is continuing to water down the AFA status.
No wonder the number of AFA's is lower than forecast.
It's a pity we have a caretaker Minister making such changes when he wont be around to have to resolve them
On 23 June 2011 at 9:40 am what a waste said:
Well, doesn't this just make a mockery of all the work and effort and 'good character' tests that everyone else has to go through. What a darn joke.
On 23 June 2011 at 9:46 am Had enough said:
Its just another indication of the developing propensity of corruption and weak governance in this country, and typical of the passage of this particular piece of financial law "reform". Is government even bright enough to be corrupt, or are they just placating certain private interests out of stupidity? I dislike being so negative, but after 3 years of trying to work with this moving feast of legislation its the only explanation!
On 23 June 2011 at 9:59 am Majella said:
This only makes sense. While I have the points to take up AFA status, I have no interest in doing so. However, within the book I lease there is a large number of clients holding insurance/investment hybrids - the early "unbundled" stuff. When reviewed, the general tenor of my advice is to inform them of the charges these plans have, as well as historical returns (mostly less than inflation over time) and to suggest that long-term savings should be in a Kiwisaver, and that for shorter-term savings, there are better options. I then refer them to an AFA. So, after 1 July, I would not have even been able to provide that information, I believe. I welcome this change - it will allow me to assist in bringing about the demise of these pretty bloody useless plans, which only ever rewarded the originating insurance agent and the insurance company thereafter.
On 23 June 2011 at 11:07 am Gecko said:
Most advisers wont have such holistic motives.
This law change will simply allow them to sit on poorly placed products and reap the trail fees.
I do feel for those advisers that sold of their books in light of these new laws having read the law it was intended
Shame on the Minister..........
On 23 June 2011 at 11:30 am traveller said:
It seems to me this whole legislative programme is on a trial and error basis
On 23 June 2011 at 11:40 am Johnny Adviser said:
Good peice of successful brinkmanship lobbying by AIA is it?

All said, a pragmatic decision.
On 23 June 2011 at 11:56 am AFA said:
Many of these Investment-Linked policies do not even have insurane cover on them! Or minimal amounts of insurance; therefore they are then straight investment products. I have such policies in a client base I purchased. Technically now an RFA could provide investment advice using these products; it's crazy! It begins to undermine all the work we have done to become AFA's.
On 23 June 2011 at 12:07 pm James said:
I Cant believe this!
Everything that this legislation has worked towards has been absultely kicked in the guts by this. First the committee caves in to allow Accountants and Solicitors immunity as an incidental service for Investment advice and now they have added investment products that somehow have Life attached!
And I as an AFA have to pay the fees and pay for anyone who wants to sue me...
On 23 June 2011 at 4:25 pm RFA Adviser said:
I thought regulation was about finding the right balance to help the consumer, not get some AFA's all worked up about the great work they have done. It's about the clients, people. And if this adjustment allows more clients to be offered a safe product surely not one of us should be critical. We would hate it more if the new regulatory environment did not make changes where they are obviously needed. Encouraging to see commom sense prevail over egos.
On 23 June 2011 at 4:40 pm Rob said:
After all the time I've wasted and money spent to be able to deal specifically with such products! - a very poor show indeed and a week before the deadline. No doubt pressure from some insurers with legacy products!
On 23 June 2011 at 4:52 pm Independent Observer said:
Commerce Minister Simon Power has got this one wrong.

I would urge the Minister to re-think this one, and provide the level playing field that has been spoken of, over the past few years.
On 23 June 2011 at 5:02 pm Simon said:
Well said RFA Adviser!
On 23 June 2011 at 5:15 pm John RFA said:
At nearly 70 and after 40plus years I saw that I was being discriminated against and my clients were going to be churned by "ethical" AFA's . My hard earned qualifications (5 years Plus study when with a young family and mortgage years ago and ongoing weekly even daily reading and conferences since did not count for anything) Qualifications and experience were totally ignored in favour of academic bulldust and high fees by scare mongers! My market has always been middle class and I have given people not only peace of mind but money in hand they would never have saved at all. Good on the Government for its decision I say.
On 23 June 2011 at 5:18 pm Mark Jory said:
I don't understand.

It seems to me that it is OK for AIA's Cash Back and Permanent Term products to be reclassified as category 2 because there is no investment element to those two specific products, it is only a return of premium.

But from the comments above, it seems that the old 'unbundled' products are also to be reclassified as category 2 - IS THAT CORRECT?

If so, that is insanity!

Most of those unbundled products have investment elements similar to any superannuation plan of Kiwisaver scheme and should be treated no differently.

Can someone please clarify where the specific list of what has now been changed to Cat 2, and what is now included?

On 23 June 2011 at 7:22 pm Andy said:
One word - U-turn!

And I see a time too that the same will happen with Kiwisaver as well, so long as people are made aware that Kiwisaver may not be relied on as the ONLY retirement plan.

Just as an aside - why can an employer or pay clerk (with no financial knowledge or experience) recommend Kiwisaver, yet an experienced RFA not do so?

Good move by Power, but if Investment Linked products are to be reclassified, so should Kiwisaver, principally as it is endorsed by the Government, and people are paid to join. Failure to reclassify this one could result in a drop in Kiwisaver members, and a future return to insurance company super' schemes! What an opportunity eh!

On 23 June 2011 at 8:52 pm Gutted to be an AFA said:

I see two separate issues to this very late change of heart:

1) What an appalling way to treat those AFA's that were led down the garden path!
After just “purchasing” my AFA status at a hefty cost.. (Time and Financial), I believe I have been completely mislead/deceived about the advantages I would obtain by being fully qualified.

I know this isn't covered under the Consumer Gtees Act... but feel the principle applies. Can I get that $1600 I paid back? And you can keep your crappy AFA status!

2) The bigger issue – RFA’s advising on a primarily investment based product. These products are prominent parts of clients retirement planning and estate planning solutions. None of which is the domain of RFA’s ! They can also be complex.

Mr Power calls them “Low Risk”. Here is an example of an RFA advising on one of my clients Endowment policies last week:

A personal banker at the yellow bank recommended my client “cash up” his endowment policy and add this to his maturing term deposit. He failed to inform my client that if he kept the policy for another 18 months he would receive the full maturity value. (Approx $80,000 higher than the value he would if he “cashes” it up today!!!)

If I find any more appalling RFA advice given to my clients on their investment linked policies, I will be the one personally helping them tackle the complaint’s resolution provider. (As well as writing to Mr Power asking – “how did I lose $80,000 in such a low risk product???)

I know this decision has been made at the whim of the provider’s lobbying, but I feel cheated, mislead and gutted that the AFA status could have been so badly misrepresented to us!! Would I have a case under the Consumer Gtees Act to get all my fees back?
On 23 June 2011 at 9:49 pm Gutted Adviser said:
Only days away from being am AFA
Once your an AFA you can never revert back to being a RFA
Your locked into the huge disclosure requirements for category 2 products when those that sat back with basic RFA status, must be laughing their tits off
7 days out what a joke
First job tomorrow is making sure my application never happens
Back to the wild west
Thanks Powers
On 23 June 2011 at 10:12 pm denis said:
Next week it won't be as easy for the public to get even quite advice on KiwiSaver. Eventually I think we might see a similar move to Cat 2 for KS.

It's a special case, I think. 50-odd KS schemes all operating under the same unifying set of legislated rules. This reduces the risk of bad advice and/or toilet-bound funds.
On 24 June 2011 at 9:18 am anon said:
Hey folks - lets remember, whether category 1 or 2 to provide an investment planning service you must be an AFA
On 24 June 2011 at 9:44 am Bede Britten den said:
I go along with fellow RFA "john". I have been in the business for 42 years , am a 37 year member of MDRT and don't have many more working years left. It disappointed me where there was absolutely no acknowledgement in the system for those of us who should at least have had part credits for our experience under a Grandfather clause. Now I can continue to practice in peace with my existing clients for another year or three
On 24 June 2011 at 9:55 am Majella said:
It seems to me that the grizzling AFAs are missing an important point, to wit: almost all of these products are no longer available for new business sales. It really is a legacy problem and this allows RFAs to at least be able to discuss these policies with existing clients. In any case, time will cure the problem.
On 24 June 2011 at 10:12 am wise one said:
All, my understanding is this only applies to a narrow definition of investment linked insurance, where the client only gets back their premiums (like the AIA one mentioned). It wont apply to alot of the legacy type products out there.
See the links to the exemption notices:
On 24 June 2011 at 10:38 am MAX RFA said:
At last the Govt has finally recognised that AFA status was just window dressing for the same incompetent Financial Planners out there recommending investments rated by flawed Investment statements / reports .
No amount of invasive note taking on clients dreams / personal details will change failed investment outcomes .

Any one who thought being an AFA made them the missing link in the evolutionary process showed a distincely low IQ the smart money always knew that studying all that irrelevant rubbish bulking up those modules was never worth the undertaking for those few Investment Linked / WOL / ENDOWMENT contracts still on the books.
Obviously the Minister must also hold these truths to be self evident.
On 24 June 2011 at 10:58 am Majella said:
Wise one - your link goes to a clause which only defines what is NOT an investment-linked contract.

"Meaning of investment-linked contract of insurance
(1) For the purposes of the Act, investment-linked contract of insurance means any contract of insurance other than—

(a) a pure risk contract of insurance; or
(b) a life insurance policy (within the meaning of section 2(1) of the Securities Act 1978) issued before 1 January 2009."


On 24 June 2011 at 11:19 am John C said:
I recommend that advisers, especially those that have made preceding comments, actually read the amendment to the regulation. Read it here. http://tinyurl.com/66myyys

It is not as open as one might think.

The meaning of ‘investment-linked contract’ excludes a ‘pure risk contract’ – and still does.

The regulator has changed the definition of 'pure risk contract of insurance' (Cat 2 product) within the meaning of 'investment-linked contract of insurance'.

The meaning of 'pure risk contract’ now INCLUDES et al, a contract "that does not, and never will, have a value on its cancellation or surrender that is greater than the value of .....(ii) the sum of the premiums paid to the insurer.

Endowment or WOL or other contracts (issued in the future) – are STILL “investment-linked contracts" as they "have or will have" a value GREATER than the sum of the premiums paid. i.e They are still Cat 1 products and cannot be advised on unless the adviser is an AFA and authorised to give advice on Cat 1 products.
On 24 June 2011 at 11:42 am Ron Flood said:
John C, unfortunately you have it wrong. An Endowment, Whole Life and Annuities are Category 2 products as they fall under the definitions of the Securities Act 1978.
On 24 June 2011 at 11:43 am John C said:
I recommend that advisers, especially those that have made preceding comments, actually read the amendment to the regulation. Read it here. http://tinyurl.com/66myyys

It is not as open as one might think.

The meaning of ‘investment-linked contract’ excludes a ‘pure risk contract’ – and still does.

The regulator has changed the definition of 'pure risk contract of insurance' (Cat 2 product) within the meaning of 'investment-linked contract of insurance'.

The meaning of 'pure risk contract’ now INCLUDES et al, a contract "that does not, and never will, have a value on its cancellation or surrender that is greater than the value of .....(ii) the sum of the premiums paid to the insurer.

Endowment or WOL or other contracts (issued in the future) – are STILL “investment-linked contracts" as they "have or will have" a value GREATER than the sum of the premiums paid. i.e They are still Cat 1 products and cannot be advised on unless the adviser is an AFA and authorised to give advice on Cat 1 products.
On 24 June 2011 at 11:51 am Ron Flood said:
CORRECTION: Apologies John C, you were referring to new contracts after Jan 2009. However, the answer is still the same. The Cabinet paper has included an investment linked contract of insurance, as long as it is not promoted as an investment. This means if you are selling an Endowment or Whole of Life based on it being an insurance contract, you do not have to be authorised.
On 24 June 2011 at 1:40 pm wise one said:
Majella, the first link showed you the act, the 2nd link shows the section of the act and the exclusions that have now been put in place. Best explanation is on page 5 of the MED website
On 24 June 2011 at 2:07 pm Mark said:
I think John is correct, this change only applies to Life Insurance policies that cannot at any time end up with a value higher than the sum insured.

All unbundled life policies which have an investment attached similar to personal superannuation plans and KiwiSaver funds, CAN end up with a higher value than the life cover taken out, based on how much you contribute and investment returns.

So it esems to me the only life policie that have been recategorised are the cah back products such as AIA's cash back life and Permanent Term, and Sovereign used to have a 50% return of premium option. So they are now Category 2 products and an RFA can give advice on those.
On 24 June 2011 at 2:35 pm Majella said:
I have recently reviewed a client (new to me but in a base I work with). She has had an investment-linked contract, issued under the Life Insurance Act, by a life insurance company, in 1996. There is in fact no insurance benefit attached. Now, 15 years later, when asked for a review of it, I have to report that while she has contributed a total of $17,933, the current fund value is $17,453 (the cash value is of course less!). We find the average return over the last 10 years is stated as 3.74% (a Balanced Fund), net of tax & management fees, but before contribution fees and policy fees. It has not even on paper kept up with inflation, let alone in reality. So, I very much doubt that this will EVER return more than the premiums paid, so where does it in fact fit?
More importantly, after 1 July, I will have to refer her to an AFA for the information I have provided. Hands up which AFAs out there would provide this service for free? I have elected not to register as an AFA, though I have sufficient "points" and 20 years experience in what was the old "financial planning" business. I would like to have the right to serve this customer, and others like her, with the advice she is seeking. While I choose not to take up the burdensome AFA costs, I do believe I'm competent to tell her that this investment-linked contract is a load of crap!
On 24 June 2011 at 3:34 pm 6ftndr said:
Haha, well said Majella, I am in your boat too and quite rightly I would also say the contract was a load of crap. But come 1st July this would obviously only be "hypothetically" speaking :-)
On 24 June 2011 at 5:25 pm under the radar said:
gutted adviser - yes I chose the RFA path very early on and laughing tits off is an understatement. The writing was on the wall over a year ago. This Govt legislation road has sucked in and spat out those AFA seekers. If it wasn't so tragic it would be a comedy. Glad I remained in the Insurance and Mtg business at least we are left alone to get on with our job now.
On 25 June 2011 at 9:50 am denis said:
Good grief, under-the-radar! Talk about a skewed perspective...I don't have to become an AFA but I did it because it is clearly going to be the benchmark qualification that public will expect you to have if you go around saying that you know about money.

If you haven't got it, you need to explain why and hope that charisma carries you over.

This Cat 1/Cat 2 debate is important, but it is mere detail.
On 27 June 2011 at 11:01 am blackjaguar said:
The Minister ought to be roundly congratulated for making this change.

I expect it will be the first of many. The new financial services regime is flawed, and it is flawed to the extent that it elevates financial planners to a position in the industry for which they are wholly unqualified and undeserving.

They constitute the very group which gave rise to the need for regulation in the first place. For them to be anointed with a title which places them above those who want nothing to do with financial planning and its naive practices is simply improper. The focus of AFA qualification requirements on valueless financial planning certificates needs to radically change.

It is completely incongruous, for example, that a professional and experienced investment consultant with a financial or business degree is able to advise, as an RFA, on the investment strategy of a $50 million superannuation fund which invests on behalf of hundreds of individuals, but when one of those individuals exits the fund the consultant is disqualified from advising that member unless they have been to ‘financial planning school’ and become an AFA.

It is also improper for financial planners to be elevated to a position which is above that of insurance advisers and brokers, many of whom in my experience have a sounder grasp on the fundamentals of finance and investment.

The regime is flawed to the extent of making a distinction between ‘Authorised Financial Adviser’ and ‘Registered Financial Adviser’. There should be one nomenclature only, as in other sector of the economy, with ‘Authorised Financial Adviser’ being abolished. Registered Financial Advisers should then be authorised to provide advice only in their areas of established qualifications and competence.

Again, congratulations to the Minister. I would be very surprised indeed if the re-classification of KiwiSaver did not occur in short order.

On 27 June 2011 at 1:45 pm celtic said:
Next step: KiwiSaver to become Cat 2.

It makes no sense to group such a heavily regulated product into the same 'risk' category as financial planning, and when that happens there will be no more reason for risk advisers to pay the outrageous AFA fees.
On 27 June 2011 at 4:11 pm Majella said:
Celtic - well said. Kiwisaver would be the only savings product I'd even be remotely interested in promoting. Can't see why AFA is needed for that.
On 30 June 2011 at 7:14 pm GaryH said:
The only reason I am pursuing AFA is to support existing linked products. A addendum to the change of regulation should be that those advisers who pursued AFA to advise on linked products should be offered the opportunity to be refunded their associated costs.
On 4 July 2011 at 10:23 am Andy said:
With so many in agreement - how on earth did this ridiculous regime eventuate?

Blackjaguar - many of us have been lobbying for your suggestion already - one registration, and you advise according to your qualifications.

but the boffins decided that was too simple.
On 5 July 2011 at 1:48 pm w k said:
@andy. I wrote to Simon Power and gave that suggestion as well, and put in detail a simple and easy to understand method as to how to effectively manage it with minimal costs to the regulators and advisors. Credit to him, he rang me, but sadly, it was rejected on the grounds that he was happy with the then proposed regulation.
I suspect, if such methods, not necessarily mine, is being adopted, there will be redundancies at the regulatory bodies. Need I say more?
On 7 July 2011 at 3:20 pm John Wayne said:
Has anyone else had the automated phone message from prime something? along the lines of 'are you sick of paying term life premiums and getting nothing back'. With our plan you will get all your premiums back. If this isn't misleading I dont know what is...
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