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Insurers want tweaks to client-first duty

Insurance companies have given the exposure draft of the new financial advice legislation a tentative nod of approval, but want changes to the duty it imposes for advisers to put a client's interests first.

Thursday, May 25th 2017, 6:00AM 1 Comment

by Susan Edmunds

Nadine Tereora of Fidelity Life

In submissions on the Financial Services Legislation Amendment Bill, insurers acknowledged there was more disruption ahead for the sector.

“Change won’t be easy,” AMP said. “Legislative overhauls in financial services have continually and significantly disrupted the industry in recent years. However, changes are needed because there are deficiencies in the current regime. Without such changes professionalising advice and improving consumer outcomes won’t happen.”

Sovereign said the new regime should improve the financial services landscape. “We note that the proposed changes are likely to cause disruption to the industry. However, we are confident that through regular government consultation and engagement with the market, the final legislation will result in an industry that meets customer objectives by improving capabilities, standards, and support mechanisms.”

The insurers took issue with the wording of the client-first obligations that will apply to all advisers. Until now, it has been the first standard in the code of conduct for AFAs. RFAs have not been bound by it.

AMP said, as written, it could have unintended outcomes.

“Ensuring that an adviser’s advice is not materially influenced may be very hard to prove definitively, given the levels of commission provided by many product manufacturers of life and health insurance products particularly.”

It said, because advisers would earn more by replacing a policy rather than amending it, a recommendation to replace almost always involved material influence. “It is arguably an impossibly high bar to demonstrate that that wasn’t the case, particularly in cases where the client benefit is modest and risks from the move are uncertain. Clarity on ‘client interests first’ we believe is required, including clearer drafting and subsequently specific guidance and examples. Relying on enforcement and/or trial and error learning would create a lot of uncertainly.”

AIA said the duty should be limited to the nature and scope of the advice. “Without this limitation, a general duty to put the client’s interests first could potentially require the adviser to go outside the agreed scope and offer other products or services if that is in the best interests of the client even if the client is seeking advice on only one particular product. This would not be possible where a financial advice provider, financial adviser or financial advice representative had only a limited range of products available to them.”

Partners said the obligation was too narrow and should not only apply when there was a potential conflict of interest. It said the duty to put a client’s interests first should apply any time a market participant decided whether to offer advice or to sell a product without advice.

Fidelity Life said it supported consumer interests being made paramount. “We believe consumers should be readily able to obtain independent financial advice through competent financial advisers who are held to a high standard of ethical behaviour. While we support the Bill being technology neutral, the value of a relationship with someone whom you trust and who operates professionally, should be reflected in the draft legislation.”

Partners also called for tighter rules around replacement business.

“We submit that financial advice must be required when a financial advice provider recommends that a retail client replace a financial product he or she already holds with a substitute financial product. This is because the client faces a heightened risk in these instances. In these situations, a financial services provider should not be permitted to sell a financial product to a retail client unless the retail client proactively and expressly refuses advice, and signs a document to that effect. This will address the risk that financial advice products are often similar, but with important differences that are difficult to detect. Unless product documentation is compared by an expert, there is a risk that retail clients will not make fully informed decisions, and be in a worse position with a substitute product.”

Nadine Tereora, of Fidelity Life, said access to independent financial advice was important to address the under-insurance problem in New Zealand.

“Independent financial advice has significant benefits for the financial health and well-being of New Zealanders. Financial advisers form long term relationships with clients, ensuring they have adequate insurance protection as their circumstances change over time, helping them at claims time and promoting and improving financial literacy.”

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Comments from our readers

On 26 May 2017 at 8:50 pm paulgogol said:
Curious to see Partners Life seeking a tightening of replacement rules after seeding its business with business rolled from OnePath. Irony aside, good on them for addressing the key risk to clients - loss of coverage due to inappropriate replacement.

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