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Who should worry about the FMA's focus on churn?

Sunday, December 14th 2014, 2:28PM 1 Comment

by Russell Hutchinson

The headlines focused on RFAs but it is not just RFAs that need to worry. Any organisation or adviser that replaces business and doesn’t follow the recommended process, designed to protect consumers from the harmful effects of churn, should be concerned.

Take KiwiSaver as an example. Ask any advisers that have many KiwiSaver clients who replaces most KiwiSaver business. It is QFEs. KiwiSaver and Insurance mis-selling are essentially introduced into the FMA’s recent report in the same breath. This was covered in more detail in the report in September on QFE monitoring.

I do not mean to suggest that an individual cheerfully churning a book of clients at the cost of their benefits and underwriting should relax. Anyone selling in a way which can harm the client should watch out. It is just that the more you do, the more likely you are to get caught. In other words, a risk adjusted approach may be taken to the review.

If a QFE or other organisation transfers a thousand clients from one policy to their own without an advice process, without a comparison, and without adequate disclosure of the risks that entails, will be far more likely to get caught than an adviser that misses out on the right paperwork in one or two cases.

Of course, it would be a dreadful shame to be caught out even for just one or two cases when it is so much easier for an individual adviser to comply. Even if you do replace business you do not need to worry providing you always follow the guidance on replacement business which can be found on the FMA website (use this link: The process is not hard.

I also think it is important to focus on the harmful effects of transfers or replacement on consumers.

In many respects these are worse in the insurance sector than they are with KiwiSaver: a KiwiSaver client who had their arm twisted to switch providers can, with a bit of hassle, switch back. An insurance client moved from one provider to another may be unable to do so. If an uneducated or unscrupulous person was handling the switch the client may lose both the original cover and the new cover – through a cancellation and non-disclosure, for example.

More care must be taken, not less, and the harm can be greater. Insurers hoping for an improvement in lapse rates may be disappointed, however. The long-run trend amongst consumers is to replace everything in their lives more often.

« Your Guide to the FAA ReviewWhen is advice not advice? The curious rise of no-advice sales »

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Comments from our readers

On 4 February 2015 at 4:10 pm AdviserMan said:
Some good comments here from Russell, and it would be good to know what the replacement rate is in the general consumer market, if it can be defined and measured.

Over the last 20 years I have noticed consumers replacing service providers for telephone, and utility supply on an increasing trend of shorter intervals... I believe today's consumer see's insurance, kiwisaver as another service they pay into, which can be reviewed and replaced, if they feel the new option 'the deal' is an advantage to them.

Better customer service, advice, and hence retension will oppose this, however offering your client a review including what they may be eligible for which is of material benefit to them, is part of the equation of 'putting your client first' is it not?

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