3 Comments 3 Commentsby Russell Hutchinson
Conduct questions are topical right now for financial services. There are lots of articles being penned about how, based on an Australian Bank’s advice on Australian Superannuation, there are probably the same conduct problems in New Zealand. Well, maybe, but in a functioning market there are always some examples of bad conduct. How widespread are they? What do they look like?
So, we need some practical, and frankly, New Zealand, examples to work with. I shall offer a couple of examples of how poor conduct can cause customer harm.
Replacement business is a prime area of concern, which is why it has been one of the limited number of areas of the life insurance sector to be examined by the FMA. As ever, it is a balancing act. MBIE likes to see a certain level of replacement business activity, because it shows a functioning market. On the other hand, inappropriate replacement, which causes harm to the consumer, is something we want to prevent, or at least, minimise. Harm can be caused when a consumer switches and loses some cover or features that they had, or perhaps if they have to accept reduced coverage due to a change in health – without realising that they have done so.
A change where the consumer is completely informed and happy – even with a downgrade – has probably caused no harm. After all, people downsize their cars and homes to save money from time-to-time as well. The tricky bit is knowing whether the advice was good and the consumer knew what they were doing. Which is why we tend to focus on the procedural aspects of advice giving, and record-keeping. The FMA has done some recent work on this, analysing five years of policy data to hunt down cases where replacement business may have caused harm. They have published their results, and, while not reassuring on a wider basis (because you cannot extrapolate from a group specifically chosen because of indications of riskier behaviour) they didn’t find many examples where the advice process could be faulted under the current law. That might be one reason why the focus has moved on to other concerns.
But what conduct issues apply to insurers? There can be many, but I shall offer just one, which could apply to you as an adviser as well. Broad product suitability, not advice as such, but a simpler question, that applies when either you or the insurer knows your product range better than the client – which should be all the time. What if a client responds to an advert, perhaps clicking on a link for a non-underwritten insurance, is a duty owed to explain to the client that if they are young and healthy, and were happy to answer the questions necessary for a fully underwritten product, that they would get cover with no exclusions and, probably, at a lower premium? Imagine the conversation; instead of just issuing the policy, we call the client and explain: ‘this might not be the best option for you’. They reply, but I don’t want to fill in the forms, as I’m leaving on a six-week tramping holiday this afternoon and I don’t have time.
Well and good, perhaps. But do you still have a duty to say, if you just filled in our online application you could still get it done? Or what about any existing cover, do you have a special events option? You can see how good conduct without good boundaries might quickly stray into the realm of advice. For once you might be glad – how much simpler it is if your whole business is about giving good advice.
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But today I want take issue with what he has said about conduct issues that apply to insurers.
The case he mentions is one where a provider has put some sales and marketing material on the net, and the customer clicks on to buy.
The thing Russell doesn’t seem to want to accept that this is a simple sales transaction. All the rules and regulations about advice should not apply to this sales transaction.
Why shouldn’t the consumer be able to buy what they see?
In asking whether or not the provider has a duty to tell the consumer that she might be able to buy something better and cheaper elsewhere, Russell’s got it all wrong IMO. I’m not picking on Russell as he isn’t the only one who thinks that way.
I started thinking about whether we could invent an efficient cover frontier (ECF). Its analogous to the risk reward matrix for investments and the efficient frontier.
The two axes would be premium (y axis) and cover (x axis). I think the ECF would be a curve that was upward sloping from the left to the right. Above the ECF curve would be inefficient – you could buy more cover for the same premium, or buy the same cover for a lower premium.
Between the curve and the x axis would be unattainable.
The EFC would be the sweet-spot.
The value of advice proposition would be getting the customer onto the EFC.
But I do not agree with the proposition I think Russell is promoting which is that there should be no sales without advice. Insurers would have a duty to tell their mouse-clickers that they could do better elsewhere.
There is no general common law principle that I know of that says a seller has a duty to tell her customer that she could get something better and cheaper if only they went to the store down the road. Caveat emptor rules
What is so special about financial services that makes regulators and commentators want to turn every sales transaction to an advice one?
Where that takes them is to a place where they end up writing the rules so that sales activity gets cloaked in the disguise of advice.
What is worse – a customer being sold (or buying as in execution only) without advice, or a customer who has actually been sold thinking that they have been advised?
I say the latter is worse; the regulators don’t seem to agree.