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Insurers need to self-regulate advisers before it’s too late

Newpark managing director Darren Gannon says the insurance sector needs to regulate itself before it’s too late.

Wednesday, September 10th 2014, 7:32PM 12 Comments

He says if regulation is forced on the sector, like it has in the AFA space, it would “decimate” insurance advice.

It is up to advisers, insurance companies and dealer groups to sort regulation before it is forced on the sector, he says.

The Financial Markets Authority has already said it plans to look at the RFA sector more closely this year. Gannon reckons the sector has 24 months to sort itself out and show that it can regulate itself.

Gannon says issues which need to be addressed include; bad advice, “churning for the wrong reason”, and fraud.

Gannon’s view is that self-regulation should be done primarily by the insurance companies. Dealer groups have a role to play, he says, however the companies have the main responsibility as they are ones who have agency agreements with advisers.

He would like to see a system where companies issue points for continuing education. This would require advisers to achieve a minimum number of points each year to maintain their dealer agreements.

Gannon says insurance companies should be able to work together to stop bad advisers from operating.

There have been instances where a company has terminated an agreement with an adviser over bad practices, only to see another company continue to allow that adviser to keep operating.

Gannon doesn’t think there needs to be a separate disciplinary body for registered financial advisers. Rather the life companies can take action. The best would be to end their relationship with bad advisers.

“I don’t think there’s a need to regulate the RFA space if collectively everyone does the right thing,” he says.

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Comments from our readers

On 11 September 2014 at 11:02 am LNF said:
Surely not. The industry has had a business model for decades based on customer interests last. Why change that
On 11 September 2014 at 11:31 am Jeff Tobin CLU, ANZIIF said:
As an adviser for nearly 28 years in both the life and general insurance areas, I have always believed Life companies "pay" too much emphasis and attention to back patting advisers for new business while neglecting badly and leaving the back door open to loss of existing business- retention.

That is not smart business practice.

However. some of this policy moving between companies is around product development and changing needs of clients and some companies do not keep up with the product development play as good as they could, that's why competition is a good thing.

However if there is to be longevity in the adviser community, and for also for many insurance companies to survive, going forward, life and medical insurers need to recognise and reward advisers better for retention and servicing of their books. Some are making efforts in this area but their report card mid term would read "can do better".

Agree that agencies and the people applying for them need close vetting and if one company has cancelled an agency for illegal practices they should not be allowed a second chance by another underwriter. Just as underwriters need to vet new applications to protect the integrity of their existing premium book, insurers have a major part to play in keeping the integrity standards to a high level for the benefit of all the adviser force.

Quality insurance advice still needs to be remunerated appropriately, quality insurance sales and relationships take effort and time to build and to service and retain, "you cannot be in two places at once".
On 11 September 2014 at 12:41 pm Adam Smith Jnr said:
The great Adam Smith wrote, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest".

To expect dealer groups to "sort regulation" predisposes that they are all working on a common goal (i.e. removing barriers of entry to consumers), when clearly they are not.

Dealer groups by their very nature have been established to extract the remaining life blood from this industry (notable high over-rides, and mass churn).

Their impact has been to further raise the level of entry (costs) to those consumers who really need insurance. Regulation is needed to restore confidence, clarity and transparency to our industry.
On 11 September 2014 at 2:24 pm Paul Charles said:
I could not agree with Adam any more - time is well overdue for some of the product manufacturers to stop acquiescing to the ongoing demands of dealer groups which ultimately only leads to higher premiums for the end user which is a direct result of overpaid commission and poor persistency - and that clearly is partly the result of churn.

Furthermore - to suggest that the industry self regulates would be like asking the All Blacks front row and the Springbok front row to self ref themselves on Saturday night - now that would be worth watching!
On 11 September 2014 at 2:27 pm Bestadviser said:
While there is some merit in the idea of insurance companies collaborating to deny those who consistently do not live up to the necessary standards, insurance companies can never regulate the quality of advice given, they do not have the advisers, or information to do so, they are not the adviser.

Requiring insurance companies to regulate (and thus be liable for) advice given will spell the end of self-employed advisers.
On 11 September 2014 at 2:51 pm John Milner said:
I have to agree with Adam. Because of a few, the insurance industry as a whole needs regulation. Darren, you need to walk the talk. Your group has a very poor reputation in this very area. It appears you're the only one who doesn't know it. I'd be very interested to see the outcome of an FMA audit on every case your group took from ING Life to Partners.
On 11 September 2014 at 5:01 pm Murph said:
Part of the problem, with the industry as a whole, is the large up fronts currently being paid for new business. This can encourage poor decisions by some advisers. I have often broached this subject with insurance company management. There is no easy fix, but I have suggested they look at phasing out the excessively high up front commissions in a way that would reward good retention rates. This could be done by lowering, over time, the up fronts and increasing renewals on business currently in force. The effect of this would be to encourage advisers to focus as much on retaining their current book of business, as writing new business. Is this feasible? I'm not sure? The actuaries and accountants would need to crunch the figures. However it may just work as it would lessen the impact of lower commissions by compensating advisers with an increase in renewal income, and subsequently the capital value of their businesses.

Still perhaps a problem for newer advisers, who to a greater degree, rely on the higher commissions to get them started!!
On 12 September 2014 at 12:32 pm LNF said:
To tidy the churn issue up companies should pay huge "finders" commissions only on the new premium content. If the replacement policy is $200 more than the replaced, only on the $200. If the replacement premium is less. Zero. All "rolled over" premium content should be paid at renewal rates, because that is really what it is
Word of advice to the industry. Do it voluntarily or the regulator will do it more harshly for you
On 12 September 2014 at 2:31 pm Pragmatic said:
Whilst it's a nice "wish" for the insurance industry to self regulate, I suspect that this opportunity has passed.

The years of super-normal earnings(whether in the form of upfronts, overrides or incentives) have not been lost on the Regulator.

My guess is that the dispensing of insurance will take on a very new appearance - with some guidance from the Regulator - within the next 3-5 years
On 15 September 2014 at 12:54 pm adviser said:
Maybe just a bit more communication between life insurers or an adviser 'black list' when a bad egg appears is what Darren is getting at here...too easy for the bad eggs to just move on and write with another insurer who welcomes them with open arms... Super normal earnings not lost on the regulator? What a load of nonsense...
On 15 September 2014 at 9:08 pm Observer said:
So if an adviser was in a dealer group and an insurer cancelled the agency agreement for that adviser, then doesn't the dealer group have an obligation?
On 16 September 2014 at 1:03 pm Cathy said:
LNF has the answer - only pay commission on the increased amount. Such an easy fix I would think! Gee that would turn some advisers worlds upside down wouldn't it?

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