Code tackles replacement business

How insurance advisers set about replacing clients’ policies may have to change when the new code of conduct for the financial advice sector takes effect.

Friday, October 19th 2018, 6:00AM

A code is being finalised that will apply to everyone giving financial advice once the new regulatory regime comes into effect.

The issue of replacement business has been a fraught one in recent years as the Financial Markets Authority has cracked down on “churn”.

Angus Dale-Jones, chairman of the working group developing the new code, said replacement business was addressed by both standards four and five of the new code.

“[These] would require a person to take reasonable steps to ensure that the client understands the financial advice (including material risks and consequences of the nature and scope of the financial advice), and to give financial advice that is suitable for the client.”

In releasing its draft code, the working group gave an example of an adviser recommending a client replace an existing life insurance policy.

It said if the nature and scope of the advice she gave the client did not include a comparison between the existing and new policies, she would need to explain that some situations that were covered under the existing policy might not be covered under the new policies, as well as any conditions that might apply, such as a stand-down or requirement for underwriting.

She would have to check the client understood those risks and consequences.

The code working group also noted that if the nature and scope of financial advice included an actual or implied comparison between two or more financial advice product, the advice should be based on an assessment and comparison of each.

Dale-Jones said the scope of advice was a matter to be addressed directly by the advice provider and client. “The code's role is to set standards, preferably at a principles-level, that apply to conduct around the provision of the advice.”

The FMA has also raised questions about the extent of upfront commissions paid to advisers.

But Dale-Jones said commission payments by product providers were outside the scope of the code. “The draft code requires people who give advice to act with integrity and manage conflicts of interest.”

Tags: Churn Code Working Group conduct