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Chicken Little and the falling sky

It’s been said to me before, J-P how about looking at the glass being half full? Funny thing is the human brain is naturally a bit pessimistic, 60/40% if the studies I’ve read on the subject are right.

Monday, August 12th 2019, 8:17AM 2 Comments

by Jon-Paul Hale

Given both my engineering background and my lifetime-held view of applying Murphy’s Law ... because if it can happen, it usually does for me. There’s probably few surprised that I’m in insurance and focused on risk in people's lives as a result.

What’s the old cliche, "if you can’t beat ’em, join ’em"?

So here we are feeling like Chicken Little suggesting the sky is falling. So much so that they issued me rose-tinted glasses last week. I’m not joking.

On the regulation subject, they’re not helping. For the reason they are rose-tinted, yes, they’re the bomb. (Check out irlen.com it’ll explain why.)

Yup, I’m finding a certain irony in being your life insurance adviser with rose-tinted glasses. But hey, if you can’t laugh at yourself, who can you laugh at?

Back to my point with the headline. Yes, I’m developing a certain level of unease with the commentary about the ongoing regulation situation.

The combination of people who don’t have life insurance, and have never personally worked with an adviser, making decisions about what we should and should not do.

And respected industry consultants and commentators, like Tony Vidler, Barry Read, and Russell Hutchinson, are all making comments of concern similarly, there’s more than selling their product going on. The old story of where there is smoke, there is fire.

Now call me Chicken Little, I’m OK with that, I’m sometimes mistaken but not often wrong. And when it comes to long-range stuff, I tend to read things reasonably well.

My big concern, Tied Agency 2.0.

Yup, that thing that is diametrically opposed to what we want for the insurance advice industry.

However, with both the magnitude of the change that needs adopting for RFA risk advisers, combined with the adviser industry’s typical apathy to change, I think we have some real headwinds. We need to be paying more attention to the world around us.

We have the providers banging the drum on getting ready, and Newpark, my dealer group, is pushing the FAP track very hard. But I’m wondering how many advisers are actually moving on this stuff. The noise to do it is loud, the noise about those that have engaged with it is deafening in its silence.

Overlay this with the FMA comments Russell reported on recently, and there are some concerns that there could be a sledgehammer to crack a walnut response to the whole oversight piece from insurance companies.

Which raises a few concerns, client privacy being one. For those of us that have more than a few agencies, is this going to mean that we have every provider breathing down our neck about the advice we give clients? Especially when we recommend a competitor's product?

Where does the privacy line get drawn? We didn’t recommend your company on that one, get lost?

I can hear it now, "but they need to verify that it wasn’t related to them, and they need to ensure, if we did discuss them as an option, that we did it ‘correctly’".

The real concern that’s coming though:

Those that are making the rules in the background really do not understand how a good risk practice works. Some of the comments made to me directly, and in the media, demonstrate that the perceptions, rather than the reality, are still the held view.

And that is somewhat alarming, as the result will be more compliance work than actual work being done, for the average independent adviser.

Because as sure as the sun rises, those in insurance companies paid salaries to manage compliance, are going to see those advisers out here as significant risks.

As a result, they will come up with overly complicated solutions to meet the RBNZ and FMA requirements of "adviser oversight". Regardless of how the RBNZ and FMA intended for it to be lightly applied. The first cut of this stuff is always OTT.

And that’s where the slippery slope comes in.

If this is too difficult advisers will thin out their providers, potentially to one or two. Many have a primary provider now with others, so the reality is not a massive change for advisers. But the resulting outcome is – more in a second on that.

The second piece is my adviser apathy comment. I am pretty sure we are going to find a significant number of advisers come July 1, 2020 who haven’t got themselves sorted for transitional licensing.

Which means they either have to join a FAP or go through full licensing to be a FAP. With the resulting loss of safe harbour on the qualifications. Which means no qualifications, you’re a nominated rep, and you now have a massive issue with owning a client base you’re not licensed to hold.

This perfect storm, if it is big enough, is going to force insurers to establish FAPs for those that missed, and by default, this becomes Tied Agency 2.0.

I seem to recall a significant planning session in 2002, where this very subject was discussed, in quite some detail. And in the intervening 17-18 years, not much has changed that would suggest that discussion still doesn’t have merit. No, I don’t forget much.

With this, there becomes a genuine risk that insurers will tie the adviser force into advice for their products or plain ban other provider products. This set of handcuffs will make things difficult for the adviser caught in it. It will also make it difficult for the advisers outside as well.

Those that get things sorted could find themselves with an excellent advice business, but with poor access to product providers. And this I suspect is not the intended outcome of the licensing process.

However, for many businesses, being tied to a provider is probably an easy answer. They sell mostly that one already and they can abdicate the whole FAP bit and carry on regardless. Which is also fine, that is the point of licensing choice.

The challenge comes not from choice, but lack of choice that forces the issue, and as a result, providers decide they have enough distribution, they don’t need external advisers.

We have seen this recently with Southern Cross and the few comments from advice businesses that support the change; they’re already tied and have little to no choice, just waiting for the shackles of licensing.

Time will tell, and I sincerely hope I have this one wrong. But if I don’t, we are going to see a very different insurance advice industry to the one we have today.

In the meantime, I’m boxing along in my rose-tinted glasses having a ball.

Tags: Barry Read FAP financial advisers FMA Jon-Paul Hale licensing RBNZ registered financial advisers regulation Russell Hutchinson Southern Cross Tony Vidler

« Southern Cross – service or not?More work needs to be done on policy ownership »

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Comments from our readers

On 26 August 2019 at 9:24 am valkyrie6 said:
I agree with you Jon Paul, I have a fear that the consumer will suffer in the end if this bout of regulation become to difficult as we will see a lot very good professional independent advisers exit the industry or limit their advice to some degrees, this could also give larger dealer groups even more power over advisers in the industry and with most of these being Aussie owned I cant see how that's going to benefit NZ consumers in the long run, Aussie owned banks and Aussie owned dealer groups .
On 9 October 2019 at 9:59 pm JPHale said:
Thanks valkyrie6, I tend to agree. And when I wrote this my understanding of clause 431D of the FSLAA was fairly brief, given my intention to license my business I hadn't applied quite so deep thinking on it at that stage.

However, with discussion and hindsight things become clearer.

My thoughts here have not changed a great deal, though the risk of control and repeat of Aussie is somewhat less likely with the discussions in the last week.

What I am still concerned with is we may not avoid the Tired Agency 2.0 stuff I mentioned. ;)

The FSP and FAP issue for dealer groups isn't going away in a hurry, as it is passed law with intention and unlikely to change, given the lack of engagement or discussion the FMA, MBIE, or the pollys have had. Zero to date to be clear.

This leaves a couple of big curly ones hanging around for advisers. The licensing of insurers which doesn't extend to FSLAA advisers, but still has governance requirements over the providers for the client outcomes of adviser clients.

And the FAP issue I discussed above with the lack of clarity one month out from transitional licensing opening.

Lots of advisers are looking for the simple tick the boxes pathway of what do I need to do?

When my BDM experience of the last lot of regulation where getting FSP registrations done and disclosure docs sorted for advisers was hard work, this is a mountain by comparison. Which is not comforting.

There is the added issue that advisers finding that FAP is too hard, as in full licensing, and the noise from providers on oversight is also too hard, there is a very real risk for those advisers that remain that we won't have licensed dealer groups like Aussie, but inhouse tied commission advisers working directly for the insurers like the bad old days of the mutual companies.

Time will tell, but the peeling of this onion has a few more surprises yet I expect...

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