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Ombudsman clarifies adviser servicing obligations

IFSO has updated its case study of a complaint lodged by a client whose adviser had not checked in with him in 20 years - clarifying that receiving servicing commission usually means ongoing obligations.

Thursday, September 27th 2018, 6:00AM 14 Comments

Good Returns reported on the case in early September. The adviser in question had sold products to a New Zealand man in 1993, who then moved to Perth.

In 2011, almost 20 years after the sale, his wife emailed the insurer, wanting to review the plan. She said it listed the financial adviser, but that neither she nor her husband had any contact from him since being in Australia.

IFSO backed the client and said the adviser had not done enough.

Advisers questioned how that meant they should deal with their clients.

“I have always worked under the understanding that if my client moves to Australia then I cannot offer them ongoing advice,” one said.

“If they come back to New Zealand even for a day I can meet and provide advice while they are here. So you would think if this is the case the adviser had at least some mitigating circumstances for not offering advice previously. Or have I misunderstood the Australian regulatory requirements?”

Adviser Murray Weatherston said the case manager was optimistic in the claim that it was standard practice for advisers to have a system of regular checks with anyone for whom they had ever arranged a product, unless the client opted out.

"This finding must be subject to some debate – I am sure the pointy-heads do that, (or say they do) but I frankly would be surprised if that was standard practice across the board for insurance advisers in general."

In clarifying, IFSO said the original product in this case (a superannuation plan with life insurance) was sold to the clients more than 20 years ago, but the case was about the ongoing obligations, and the adviser’s response when his clients asked for assistance after 2013.

“The clients didn’t understand how their product worked and they became concerned about changes the product provider was making to it.  They asked the adviser for a review and, later, for assistance to understand the changes being made, which they did not receive," said deputy ombudsman Louise Peters.

While the adviser said he had retired and was not taking new clients, he confirmed he was receiving a servicing commission as the servicing adviser. “A servicing commission, in respect of a client, is a payment for a service to that client, usually with ongoing obligations.”

Peters said the financial services environment has changed significantly, since the Financial Advisers Act was implemented, and financial advisers who had been in the industry for a long time needed to reassess their practices.

The IFSO Scheme found that the adviser had not met his legal obligations, in respect of the clients’ requests for a review and for assistance to understand the impact to them of the changes the product provider was making. “The adviser did not have a practice of providing regular reviews, he didn't have a servicing arrangement in place with these clients, and he didn’t respond adequately to their requests for assistance.” 

The client had wanted to arrange for advice to coincide with travel to New Zealand.

Peters said it was a good case to learn from.

“Advisers have a really important role in helping clients understand products. The opportunity for clients to get personalised advice, and to have products explained by someone with technical expertise is the real value advisers add for their clients. I look forward to discussing the case further with interested advisers at our webinar in November.”

IFSO said the attention paid to the case had been a good reminder to include more detail in the case studies it released.

"While we ensure case studies are anonymous, they can be helpful for advisers to understand what went wrong, how the complaint could have been avoided, and the reasoning behind our decision, which was to uphold the complaint in this case.

“We know that advisers have a key role in helping clients understand financial products. This case is a good reminder of this role. As we get so few complaints about advisers, each one is a great opportunity to reflect on how we can all improve our business processes.”

IFSO will run a free webinar on November 7 about the case.

Peters said it highlighted the level of service expected of advisers in light of their obligations under the Financial Advisers Act and the Consumer Guarantees Act.

The revised case study can be found here.

Tags: Financial Advisers Act IFSO

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Comments from our readers

On 27 September 2018 at 9:12 am mike.lay said:
This is where the sysyem falls down in New Zealand. The adviser that sold the policy all those years ago gets the renewal commission but if the client had appointed a new adviser, the old adviser continues to receive the servicing fee. This is outdated practice for our industry.
On 27 September 2018 at 10:27 am James Sheridan said:
Quick question on this.
Does the Adviser have the right to contact the Australian client via email newsletters etc as this may be prohibited under the Australian Spam Law 2003 unless express consent has been given.
Also can the Adviser hold personal information on the Australian Client, as this is very complicated for an overseas entity under Australian Privacy Principles.
Hopefully the IFSO can clarify our obligations here.
On 27 September 2018 at 11:03 pm RiskAdviser said:
What's at point here is the ongoing servicing of the client for a product that was advised and originated in New Zealand.

Almost all life insurance works outside NZ, it is stated in the policy wordings, so it's a little naive to turn around and sight overseas privacy regulations.

The client by the nature of holding and then updating you with their information is implied consent under the law in both countries. It's only the latest introduction of GDPR that has required explicit consent for EU citizens and people residing in the EU.

The discussion about payment is one that needs an update. We have many different situations with payment and servicing.

Some companies pay a servicing commission, others pay nothing for servicing that was the upfront commission and what is paid ongoing is an asset commission to reflect the value that policy brings to the insurer and the adviser business.

Keeping in mind the value of the ongoing payments from the providers is how all of our client bases are valued.

Depending on the agency agreement in place and the product at the time, it may be servicing, it may be renewal, it may be asset. The contract behind it (agency agreement) outlines the obligations for the adviser, they may not say servicing.

To say that they got paid means they are responsible when the adviser has lost touch and has tried reasonable means to make contact is a bit tough. This isn't necessarily that case here, however, there needs to be a reasonableness applied on both sides as the client is also responsible for their policy too. (In this case, they did reach out for service)

What really is in question is the promise made to the client. Is this an expectation based on what they think they should receive based on today's approach? or was this from an implied or expressed promise to service the policy when it was sold?

Different times and different approaches, yes the policy still exists, however, to assume today's rules for a policy sold 30 years ago that hasn't been touched is too tough. And there's some argument about living under a rock in there too. Yes, if you pick it up then you need to start again with today's advice requirements.

The discussion on payment doesn't necessarily follow servicing obligations as a change of servicing doesn't move the ongoing payments to the original adviser

And what about the thousands of policies out there that don't have a servicing or asset commission? Does the retired adviser continue to still have liability risk until their grave because no one wants these policies and they're stuck with them?

We do need changes in this area as service is a key complaint many clients have. Going forward it can be fixed, with a split asset/servicing model, where some follows and some doesn'e, historically much harder as there are contract considerations that the new legislation needs to consider.
On 28 September 2018 at 2:37 pm Brian W Brown said:
so where does the individual company stand that receives ongoing renewal for ex agents.As it stands at present if the company ask a broker to service an orphan client the broker doesnt automatically receive the renewal that was being paid.I have numerous policies in my agency where no renewal is paid to me but as its built into the policy the company still gets it.If i am to be held accountable because i receive a renewal then surely the company would also.
On 28 September 2018 at 8:42 pm RiskAdviser said:
Brian and this is the can of worms this whole decision opens.

Because there is insufficient context, it has the potential to set a president that all advisers that touched the contract, assigned servicing rights or not, have a responsibility for it and the client.

Be it servicing equals policy access, or financial revenue streams from it.

It also potentially leaves those leaving the industry, retiring after a long career or after a short stint, and selling their bases responsible for the ongoing servicing too.
On 29 September 2018 at 1:50 pm Murray Weatherston said:
I am working on a larger response to IFSO restatement of the case, about which I have a number of questions.

But there is one issue mentioned above that I want to red flag right away.

That is the nature and obligations of servicing/trail commission.

The first thing to sort out is what is the contractual relationship? That's Law School 101.

There is clearly a contractual relationship between the manufacturer and the adviser. The manufacturer at the time the business is first introduced agrees to pay an initial commission, and may agree to pay an annual fee so long as the business remains on the book, and the client has not advised a change of adviser.

In a lot of cases of which I am aware, there is no contractual obligation by the adviser to the manufacturer to do anything. But if there is, this is an obligation by the adviser to the manufacturer.

Now turn to the ongoing contractual relationship between the adviser and the client? My guess is that in other than investment cases, there is actually no contractual relationship between the client and the adviser ab initio.

If the client goes back to the adviser, and the adviser accepts the client for a new interaction, there will be a relationship.

But I fail to see that an adviser who writes business for a client in 1993 and has no contract with the client to provide ongoing service and advice should be held accountable 10, 20, 25 years later.
On 29 September 2018 at 6:59 pm RiskAdviser said:
Murray, completely agree with your points.

The agency agreements are the contract between agent and provider. The extent of activity expected of the adviser by the provider is outlined in this agreement, if at all.

As to the contractual obligations and arrangements with between the client and adviser, implied if any as there won't be a formal contract, certainly not 24 years ago.

However, depending on the insurer and the declaration and consent signed, there may be link from the client via the application to the insurer and then back through the agency agreement to to adviser.

I doubt any D&C is that sophisticated, but it is a possible pathway.
On 1 October 2018 at 9:44 am Tash said:
Completely agree with you Murray. We ALL have to hold anyone who can make binding rulings in law to proper analysis and application of law! Not application of 'what I think it should be'.
On 1 October 2018 at 10:54 am LNF said:
Rules and decisions "on the fly"
If you take maximum "up front" and smaller renewal commission does that mean you are less obliged than if you take minimum "up front" and maximum renewal
Ridiculous and being driven by a bunch of bureaucrats
On 1 October 2018 at 2:15 pm SonnieBailey said:
Murray's comments are great and I'm interested if we hear anything further from IFSO.

My two cents at short notice:

This is a question of law that's being "decided" by a case manager for a dispute resolution scheme, not a court of law. My suspicion is that if this went to an actual court, the finding would be different.

IFSO resolves disputes. Dispute resolution schemes make decisions based on their terms of reference (TOR) (IFSO’s TOR is here: https://www.ifso.nz/assets/TOR-1-July-2015.pdf)

If you look at clauses 12.1 and 12.2 of the TOR you'll notice that "When making a decision about a Complaint, [IFSO] will do so by reference to what is, in its opinion, fair and reasonable in all the circumstances.” It continues that IFSO "shall have regard to... any applicable law... the rules of natural justice... [and] relevant industry practice".

Note that IFSO has regard to these things. But that’s different to being bound by them. Its decision criteria is based on fairness and reasonableness, not necessarily the letter of the law.

I'm going out on a limb, but my guess is that the case manager had a view based on fairness and/or reasonableness, which is within the TOR. Legal arguments were used to justify (rationalise?) the decision.

This case gives an indication as to IFSO's views about this matter. Or maybe just one of its case managers - I don't know. But as clause 12.1 of the TOR sets out, it's not bound by its previous decisions so who knows whether it would say the same thing in a different fact situation. It doesn't necessarily tell us what other dispute resolution schemes would say or what an actual court would say.

If the adviser in question had been able to provide evidence (eg file notes, communication via letter/email) that showed they clearly managed the clients' expectations and understanding of the scope of their service when they helped them in the first instance, this dispute might have had a different outcome. Who knows.
On 1 October 2018 at 2:45 pm interested2 said:
All valid questions and comments but still missing, What is the obligation (if any) on the client to maintain the relationship, or at the very least, provide contact details.

An adviser business can send info to last known address, call disconnected numbers and email an old ihug account all day long.

Where is the threshold when we say, haven't heard from him in (e.g.) 24 months, mail is returned, they are no longer a 'client'. And what then, you can't cancel the policy they are paying, or plan they have invested in. You can't get the contact details from the bank they pay from. What then?
On 2 October 2018 at 11:13 am gavin austin adviser business compliance said:
Interesting debate. One point not covered in MHO is that no one has picked up that Adviser "ABC" being an RFA was not permitted in the FA Act to provide advice for a cat one product which is the product in question here.

A super scheme (investment cat 1 ) with life cover (cat 2). The product provider should have picked this up as well and advised the client that only an AFA can give the advice.

The timing of events (attempts to contact by the client for advice) is important as the FA Act may well have not applied - just a thought.
On 2 October 2018 at 11:47 am Tash said:
Even decisions based on fairness and reasonableness must have their basis on objectively accepted realities and the 'broader law'.

If we descend into a world where binding rulings (which cannot be appealed against) can simply be made by a particular individual (over whose appointment and suitability to do the job I have no say) based only on that particular invividual's own subjective opinions of what is fair and reasonable (which may be based on nothing more than their own limited understanding, experience and prejudice), any laws or Codes of Conduct become meaningless and we have no certainty at all about what conduct/advice is acceptable.

No civilised modern economy can work like that and I certainly cannot be an adviser in a world like that.
On 9 November 2018 at 8:15 am Murray Weatherston said:
A couple of days ago, IFSO ran a webinar to discuss this ruling.

Their website said an audio recording was available, so I asked for a copy.

Amazing response from IFSO - "no, it is restricted to members."

Doesn't seem to demonstrate the sort of transparency that we would expect. What's so proprietary or secret?

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