Rules set to get a lot tougher for many advisers

I finished off before Easter talking about the health and safety experience, which is something we have been watching and involved with at some level.

Monday, April 29th 2019, 8:12AM

Jon-Paul Hale

What is happening with health and safety in terms of compliance action, will be what we in the financial advice sector, too, under the Financial Services Legislation Amendment Act.

The minister in charge of WorkSafe has said they are looking to step up the approach with H&S compliance, by issuing on-the-spot fines. Much of the noise there has been about threats of court action to drive compliance, that's all about to change.

And no for us, that's not scaremongering, if you bother to look at the FMA website. Under their "news and resources" section, you will see many different situations and reports: Investigations, court decisions, cases before the courts, and enforcement  zctions. FADC has had just 9 cases since 2013, and six were in 2013. There is more activity with cases before the courts than much of the rest combined.

Moreover, this is a lot to do with the limited number of AFAs and entities the FMA presently has jurisdiction over. You now add 25,000 advisers, current QFE and RFA advisers, that have to adhere to the new code, and you have opportunity to pursue a whole lot more people in a whole lot of new and different ways.

What we know is the FMA has been quietly, and not so quietly, doing its research, and they have stated they have been frustrated with the current rules hampering their ability to pursue RFAs.

Basically, unless an RFA breaches the Fair Trading Act or the Consumer Guarantees Act, there is little under the current FAA that the FMA can use against an RFA adviser.

Which is both concerning and disturbing. There is more the FMA can do with insurers, but insurers are not the ones giving the advice, which is the rub here. That it is all about to change.

So my long-winded rambling, across three articles, the FADC decision and recommendations.

The real issue in question with the FADC CS8 decision against the AFA adviser was one of the suitability of the advice.

Was the advice suitable for the situation of the client?

In a word, no. The policy did not work as intended, because of the non-disclosure involved with the case.

Where the adviser concerned became culpable is when they decided not to include the information they knew about, and the insurer specifically asked for on the application form; have you had insurance cover in the past declined or offered with terms?

Without the disclosures around the back (which the adviser should have also said something about to the insurer) the misstatement of the terms question being accepted by the adviser is where the real issue lies.

Also, many will say, but that's section 10 and an issue with the insurer. And you would be right, it is. However, it is not the whole picture.

What many don't realise, and myself being one of them until recently, is the code puts the adviser into the position of being the jelly in the PB&J sandwich. The AFA adviser under the present code has the responsibility of representing both the insurer as their agent and responsible to the client for the suitability of the advice.

Which is where the jelly gets a bit messy!

In this case, the section 10 issue isn't before FADC; that's another issue to be or has been pursued elsewhere. The issue before the FADC is the suitability of the advice.

Which is the very concerning part.

With the AFA adviser concerned knowingly not passing on the information to the insurer, the AFA achieved two things. He removed the ability for the insurer to ask further questions and request medical notes, and consciously put the cover for the client at risk.

Now in my humble opinion, knowing what I know of the likely underwriting decision on the information we have been provided, even if the disclosure on the back had happened, the underwriter would have likely ignored it, and not requested any medical notes, or changed the terms. Which would not have discovered the broader lack of client disclosure the adviser did not know about.

Which is why I said what I said about reasonableness and my sympathy with the adviser concerned in my previous comments.

However, that is not the point here. We are quite clear on the section 10 piece. So the extent of this is likely a minor point against the context of the other conditions not disclosed. Moreover, it is outside the FADC scope for recommendation.

Given the lack of disclosure, and when the previous medical issues arose, it may not even be an issue of a problem with replacement, as the prior cover may have had similar issues if tested. Don't know, haven't looked that deep, more to illustrate this isn't the CS8 issue.

The issue here is the adviser knowingly withheld information from the insurer that could be considered material. Backs are one of the key claims for disability insurance products.

So it is this point, relevant or not to the claim, that CS8 is specifically testing with the adviser.

  1. Because the AFA adviser did not pass on the information they knew about, they put the policy at risk.
  2. In putting the policy at risk, the AFA adviser knowingly undermined the suitability of the advice they gave.
  3. Which makes them non-compliant with the requirements of CS8.

The lack of disclosures by the client, right or wrong, is not the issue either. It is the conduct of the adviser that is being tested here. It is this particular point of omission that has lead the FADC to its decision that the adviser is culpable under CS8.

Which also places all of us in a precarious position when it comes to managing our risk under the new regime. FSLAB and the new code is written with the knowledge and understanding of the failings and shortcoming of the previous legislation, which means that there is going to be more of these examples in the future.

Also, while the past is not something the new legislation is retrospective about, there is a retrospective issue we need to consider.

However, that's for the next one. Take it easy!

Tags: FADC FSLAB Jon-Paul Hale

« Part 2: FSLAB & FADC and what it means for us RFAsWhat is retrospective risk? »

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