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Part 2: FSLAB & FADC and what it means for us RFAs

In the second part of his commentary on the recent FADC case, adviser Jon-Paul Hale says the requirements expected of advisers is likely to cause havoc.

Tuesday, April 23rd 2019, 9:02AM 6 Comments

From what I have read and discussed, there appear to be some key learnings that we as insurance advisers are going to have to take into account looking forward:

  • Context and environment
  • Professional conduct expectations, practice vs law
  • The measure of suitability.

Also, I appreciate that most of what follows is based on the current AFA standard and not the new code, which we are yet to see.

Professional conduct, what I won't be popular with saying is the FADC's report comments around risk profile as a measure of risk to the insurer is somewhat on target. Underwriters and insurers consider advisers to be the first underwriter of the client, assisting them in ensuring the picture of the client is the picture of the client.

This is why we have the section 10 requirements under insurance law about disclosure to an adviser is disclosure to the insurer.

However, while there is a practical issue in the decision that is relatively easy to manage with investments, it is considerably more difficult with insurance.

And that is the due diligence expected to verify the information provided by the client with external sources.

Moreover, while a lot of the comments have been suggested that getting client medical notes wasn't the intent of the FADC report discussion, it does lead there if you are to take the logic of external verification of the risk profile the client represents to the insurer.

With insurance, there are three key areas underwriters look at:

  • Financial - what's the loss and is it demonstrated?
  • Occupational and Activities, what do they do and where do they do it, and for how long?
  • Medical - what's their health and lifestyle like?

For things like income and financial positions, reasonably easy, authorities for access to Bank accounts, Financial statements with Accountants and ACC. On the financial side where this gets difficult is with accessing information from the IRD and other financial institutions that are not quite so adviser friendly.

The occupation and activities are reasonably contextual, their disclosures, what you see around them, and things like payslips and employment contracts. You'll know they do something a bit risky as they'll generally either tell you or they will have things around that suggest you need to ask more questions. Trophies, stickers, equipment, vehicle accessories, all manner of prompts.

Though more pertinent to the FADC case is the issue of medical information. And stay with me here, I appreciate the intent in the report is likely not to be about getting medical notes.

The FADC decision has the potential to set the expectation that advisers need to submit medical notes with applications to ensure they have done their due diligence, which creates all sorts of havoc.

We have enough trouble with insurers accessing medical information from medical people, having advisers do this is frankly unworkable.

So without the client's authority to access information, the adviser is unable to verify any external sources on the medical side. The D&C signed on the application does not give this authority to the adviser.

So why would we need to do this?

Because the FADC report commentary is suggesting that client disclosure should be verified with third party evidence. And while a good fact find and questionnaire upfront is likely to keep the majority of us out of trouble, it is the extension of the FADC report into the hands of the FMA and how they then regulate us that is the piece advisers need to understand.

Moreover, this is because the people regulating us do not necessarily have an advice background, or have been advisers. Yes, there is capability from industry working in the FMA, which is good. However, that does not mean that the investigator investigating you has any of that. Such reports like this one will be reference sources for those people.

I've said in many other places the new law being based on principals is structured to test cases in court, not in front of panels of industry peers, but panels of our public peers.

This new environment Health & Safety has been working with for three years, and the gloves are coming off. The new regime for us has been clearly signposted to be about three years before the FMA really gets dug in on compliance. So we already have a reasonably clear idea about what that playbook looks like with actions to date and comments released.

The FMA is waiting for all of this to work through, so they can then regulate RFA's like they do with the advice industry they cover already.

I'll be back in the next one to talk suitability. 

Tags: FADC FSLAB Jon-Paul Hale RFA

« FADC case shows RFAs face big challenges under new lawsRules set to get a lot tougher for many advisers »

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Comments from our readers

On 26 April 2019 at 2:43 pm regant said:
Huh? Where'd you get this thing about "verifying external sources"??

heres the doc:

scroll to page 8, and read from para 25 on.
The absolute key here is "reasonable enquiry"
That does NOT extend to external verification at all.
That's what the PMAR process is for.

In 26 we are told that, "assuming reasonable enquiries are made", an adviser may rely on what he or she is told by the client, but cannot ignore info that is otherwise known to them.

We must alert the client to their duty of disclosure, give them an appropriate level of interrogation, have a proper documentation process and all that.

But taking on medical notes is way beyond the definition of "reasonable enquiry".

In fact, I submit that taking on external info puts the adviser at greater risk, not less, because now you would risk having "personal knowledge that is inconsistent... ".
On 26 April 2019 at 8:36 pm Ron Flood said:
Jon-Paul, as I understand it, the Privacy Commissioner has already stated that insurers can't ask for full medical notes as a common practice at time of application. Obtaining these at claim time was not questioned.
I may be wrong, but I think this came out of a complaint, when Sovereign started getting 5 years of medical notes on a large volume of applications.
On 29 April 2019 at 3:04 pm JPHale said:
Oh good, someone is reading my lengthy diatribe...

Thanks for your comments guys.

Reagan while I agree with your points, that's what the PMAR process is for, it's not always triggered without the associated disclosure from the client that something needs to be asked for. Unless you're doing large sums and much older clients.

Where I'm coming from are points raised about the middle of the report, points 24, 25, & 26. More specifically around the requirement for the AFA to make a reasonable enquiry in relation to the risk profile. Now most of us read that as the investment risk profile, the FADC has applied this to the insurance risk profile the client represents to the insurer (medically).

The logical extension of that is an adviser on notice of non-disclosure should be either asking more questions (the usual approach) or seeking further external verification and responding to the client about the limits on the product from the lack of disclosures. (If the AFA had written back to the client stating that the back not being disclosed would put the cover at risk, they would have avoided the CS8 issue)

As I also pointed out, the FADC decision wasn't about seeking medical notes, however, as an insurance adviser this decision puts us in a position where we can be hung out to dry if we have knowledge of the client's non-disclosure. Which drives the subsequent need to externally verify the information provided and manage it fully within the expectations of both Section 10 and CS8.

@Ron, yes the Privacy Commissioner in 2009 set a directive that insurers can't go fishing at application time to find medical information, they still can at claim time and do so with most claims. Sovereign and Asteron have both had a change of stance on this in the last 12-18 months, the rest still request 5 years notes at claim time.

Part of the issue MP Faifoi had on the FairGo article last year was on the basis insurers were not requesting notes at application time, I had the opportunity to raise this with him last year and discuss how the Privacy Commissioners directive in 2009 was explicitly contradicting his desire for the insurers to do what he demanded on FairGo.

The short answer on the situation of the decision is a decent clear fact find that captures the medical history and then an SOA that addresses the medical history and disclosure requirements would have substantially reduced the adviser's code and conduct exposure.
On 30 April 2019 at 10:09 am Tash said:
Jp I have to take issue with you. You claim 'Now most of us read that as the investment risk profile, the FADC has applied this to the insurance risk profile the client represents to the insurer (medically)."
Who is 'most of us'? I certainly don't read it that way. I read it as the risk profile of the client in respect of the personalised service being offerred. IE the adviser must have enough knowledge to determine whether insurance is right for the client, or what type of insurance and what options, waiting period,payment terms etc. It also is about the risk of the client actually getting new or replaced cover 'risk free' and will there be terms and whether these will negate insurance or replacement as a solution. It is about client risk, not the risk faced by the insurer.
I agree with Regant, the FADC did not say advisers had to prove the client was telling the truth or verify their statements.
On 30 April 2019 at 9:04 pm JPHale said:
Tash when I say most, I am going from my experience where predominant the demonstrated attitude has been "that is referring to investments, I do insurance it doesn't apply to me." I didn't say all...

And I certainly agree with your points, "the adviser must have enough knowledge to determine whether insurance is right for the client, or what type of insurance and what options, waiting period, payment terms etc. It also is about the risk of the client actually getting new or replaced cover 'risk free' and will there be terms and whether these will negate insurance or replacement as a solution."

Though nothing is really risk-free either. What has also been demonstrated in this case is the issue is also about the risks the client has in terms of change of cover or even taking cover from scratch, at the same time it is also about the risk the client represents to the insurance company and how the adviser represents that client to the insurer. Which has always been the case with section 10. Many clients don't understand or appreciate that the risk in insurance is the insurer taking the risk on the client, not the other way around.

The point is the adviser concerned had a responsibility under CS8 to ensure that the advice given was suitable. The FADC process, report, and other information provided to me, has been clearly on the vein of once the client demonstrated an unwillingness to disclose the material information the adviser knew about, the adviser was on notice to further investigate the veracity of the clients statements and adjust and restate the advice as a result of the position they found themselves in. In failing to do so they put themselves in the firing line under CS8.

And my point is not so much about this decision as it applies to RFA's today, as it does not apply under the present law or code. CS8, as it stands, will not apply to what are currently RFA's in the future either. However, it will apply in it's published and updated form in the new code under the new legislation, and that is where the overarching lift in responsibility and expectation is going to land, with this case as a guiding case for the investigators of the regulator.

The basic tenant is the adviser is the one with the knowledge, understanding, and experience in the area of the application of risk and risk management. The adviser will be expected to operate in a professional manner at a level and understanding significantly greater than what we have today, which shifts the balance of responsibility further toward the adviser to ensure that the client covers what they need to cover. Regan's point about more information creating more risk, in placing the cover yes, in reducing your own, no. Provided you ensure that all information is considered and managed.

This has never been about getting medical records, as I have stated several times, however, it is about the adviser conducting sufficient investigations to ensure that the advice is suitable, the client has not snookered themselves with many of the typical issues an adviser is both aware of and in a position to manage, and the cover and policy works at claim time as intended.

And it is this case that is going to be used as an initial measuring stick against risk advisers once the new rules apply. Rightly or wrongly, that's what will happen and it will likely put many advisers at a distinct disadvantage in defending themselves if they don't take steps and measures to improve their advice processes from where they are presently.

Remember, in these cases, the application forms in the client's handwriting was no defence or protection for the adviser either.
On 1 May 2019 at 7:53 am JPHale said:
BTW, many of these points I talk about in the next article to this that has been published...

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