Finally, a breath that suggests it's not all about the advisers and their advice

As an insurance adviser, one of the challenges with the rhetoric that has been thrown around over the last few years, you could be forgiven for thinking we're the new whipping post.

Tuesday, October 1st 2019, 8:32AM

Between: the advisers are the problem, the advice stinks, the products they sell have no value, the commissions drive the wrong behaviours, and the trips are evil, there's not much to sit back and say that the typical insurance adviser adds to our economy.

Talk to any adviser, and you'll hear stories of clients facing the worst and the success of the plan their adviser put in place helping them through. Which is all missed in the more recent beat ups.

Commission-based sales people, yes. Is commission bad? Maybe, it has been said it is better than the alternatives. Because it is, it is far more visible than all of the other options, and it is more manageable than many of the hidden incentives that come with employees for VIO’s.

Am I defending high upfront commissions? Not so much. More commission is the most effective tool for the job. Should the upfront come down, possibly? However, the quantum of cost for running the adviser business doesn't change; the money will still have to come from somewhere.

Which is why I found Hon Kris Faafoi's cabinet paper on the conduct of financial institutions quite interesting. https://www.mbie.govt.nz/assets/conduct-of-financial-institutions-introduction-of-a-new-conduct-regime.pdf

Trips and volume incentives out, commission in. Nice. Hopefully, this will hold the expected noise from a certain member of the FMA board at bay. The higher-ups have deemed commission acceptable.

A couple of clear messages that I took from the paper:

This is about regulating banks and insurers, including NBDTs, not more regulation for advisers as has been suggested with the regulators' noise since February.

"44.1 Not licensing or directly regulating intermediaries or other lenders who are not banks or NBDTs could leave some outstanding risk of harm to customers. However, these entities are not unregulated – consumer credit and financial advice regulation, for example, still applies.”

I found the following plainly worded comment somewhat vindicating the work all advisers and associations have done to tell the Government they haven't focused on, or missed, parts that are causing harm.

"Moreover, the majority of the conduct risks and poor outcomes for customers that have been identified to date arise in and originate from banks and insurers.”

First cut, as some of this may in time be extended.

"Licensing these entities is therefore expected to address the majority of the risk. Consideration can also be given to whether the scope of the conduct regime, including through licensing, should be expanded in the future.”

However, good to see some direct action against the single-product providers who typically have poorer products and the lightest approach to advice.

"Recent reviews have identified that banks and life insurers lack focus on good customer outcomes, and have insufficient systems and controls to identify, manage and remedy conduct issues. This creates real risk of misconduct and I have heard New Zealand examples of actual misconduct occurring (for example, customers being sold insurance products that they are ineligible to ever claim on).”

I'm pretty sure you, as an independent adviser, like myself, have never advised on a product that doesn't have the potential for a client to claim. Yet I am sure we have all seen covers clients have paid for that won't meet expectations.

One shocker I had come to me was terminally ill and looking to access the credit card terminal illness insurance, on a card that had always had its balance paid off, but still paid a premium.

And one of my hooray moments, I have been wondering how this has prevailed so long under the present rules:

"I propose that licensed entities be accountable for sales made by intermediaries who are not financial advice providers (for example, car dealers and retailers selling add-on finance). This will ensure that the obligations on banks, insurers and NBDTs flow down the chain of supply and result in better outcomes for customers that deal with intermediaries.”

"Mechanisms to address the conduct of intermediaries.

Licensed entities to be accountable for sales made by intermediaries who are not subject to new financial advice regime (paragraphs 49-52).
Licensed entities not to be directly accountable for the advice provided by intermediaries that are subject to financial advice regime (paragraphs 53-58).”

Which gives us a clear picture of where these changes are directed. Not advisers under FSLAA.

However, in holding banks and insurers to account for their conduct, the regulator will be including the products they manufacture and distribute in this too.

This is where we will see some noise.

The insurers making sure we are trained and accredited on their product ranges. Yes, more training and ongoing training.
The conduct of advisers when implementing cover with the provider:
Things like disclosure and completeness of information on a test of conduct basis. There is a stat floating around that 50% of applications submitted are incomplete when it comes to initial underwriting.
This will create a greater gap between adviser and provider, where problems caused by the adviser will get kicked back to the adviser.
Providers will stop taking on the issues caused by advisers, as they have done in the past. As the commercial reality of this licensing will dictate, they push it back or face substantial penalties.
One area that will come under the microscope is replacement business, as this is the area that creates most of the issues. Also, the reality is advice on replacement business in the industry is pretty poor. Maybe not with the client directly, more with the documentation provided to the provider, if it is provided at all.

So more interesting times ahead, though less focus on us, we already have plenty to tackle.

A couple of things that pop out of this that need some attention.

How's your documentation on replacement business? Pretty light to rubbish? Might pay to start addressing that now, most of the time it is as simple as writing down what you actually said to the client.
Document all decisions the client makes.
Undocumented poor decision making on the clients part becomes the adviser's problem.
The asymmetry of information discussed in the cabinet paper already puts us on the back foot.
If the client is doing something that is obviously not a great idea, staying when they have no cover, or moving and having exclusions, document it more than just having the terms signed.
Why did the client move? What was the compelling reason to not take the cover needed or why did they take on the exclusion when they had cover already? Typically we know why; without the documentation, you're stuck in the corner.

I had a good chat with the FSCL team in February, and one of the most significant issues they faced with complaints was the lack of file evidence. It may have helped not to have evidence against you in the file in the past; it is not going to assist in the future with penalties for not maintaining adequate records.

Moreover, remember, if it's not written down, it never happened.

Tags: Commission conduct Jon-Paul Hale Kris Faafoi Life insurance Opinion regulation