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Disclosure warning as new regulations come into effect

Insurance advisers are being warned to clearly disclose all fees and charges after one broker was caught adding $34,000 of additional charges to a client’s policies over a period of three years.

Thursday, March 18th 2021, 1:57PM 1 Comment

by Matthew Martin

Susan Taylor

New rules and regulations for financial advisers and insurance brokers came into effect on Monday this week, along with requirements to disclose more information to clients.

Financial Services Complaints Limited (FSCL) chief executive Susan Taylor has welcomed the new financial advice regime. She states the additional legal duties and licensing requirements financial advisers, including insurance brokers, must adhere to are a positive step towards improving industry standards.

“We believe the new disclosure regulations which form part of the new rules, including disclosing fees, commissions earned, and conflicts of interest are important in ensuring transparency. The client needs to understand what they are paying for,” Taylor says.

A recent case investigated by FSCL demonstrates how important transparency is, after a pair of small business owners discovered what they thought were insurance premium costs also included fees for their insurance broker.

According to the FSCL, when Tony and Liz (surnames and location not disclosed) first placed their insurances through their broker in 2016, the broker sent them a bundle of paperwork more than 50 pages long.

Within the documentation, there was one note stipulating that premium charges may include a “documentation fee”.

However, when the broker arranged for the renewal of the couple’s insurances in 2017, 2018 and 2019, the wording on the coverage summaries simply stated “policy charge”.

In late 2019 the couple moved to a new insurance broker and discovered their original broker had charged them a total of $34,000 in fees within some of the “policy charge/s” listed on the summary pages.

It was at this time the couple lodged a complaint with FSCL.

“Whether fees were included or not was not apparent from the face of the coverage summaries,” Taylor explains, “they all simply had a dollar amount beside the words 'policy charge'.”

Tony and Liz were distressed to learn about the fees. Especially as they had been under the impression that their monthly payments were for their insurance premiums only.

They said they never saw the note that premium charges may have included a “documentation fee” and the broker had not drawn their attention to the sentence in the documents they received.

The broker said the fees, some as high as $12,000, were justified as they did a lot of work for the couple, that they took some of the lowest commissions from insurers when compared to their competitors, and that all they were required to do was to let Tony and Liz know that a fee “might be charged”.

The FSCL formed the view that the coverage summaries were in fact misleading and in breach of the Fair Trading Act 1986. Consequently the FSCL recommended the broker refund $34,000 in undisclosed fees to their former clients.

“All the coverage summaries looked the same, giving the impression that ‘policy charge’ was simply the premium payable,” Taylor says.

“It is okay to charge fees, but it is not okay to hide them.

“If you hide them, then you do not have your customer’s genuine agreement to pay them.”

Taylor says she is unsure if life insurance was part of the policy package.

“We haven't come across this practice in life [insurance] advisers – it's only been seen in fire and general at this stage.”

However, Taylor says the decision could be seen as a general warning to all insurance advisers about the need to be fully transparent with their clients. Especially now under the new rules and regulations introduced on March 15.

The new disclosure requirements specifically outline that advisers must disclose all the ways they will earn income when clients use their services, including the following.

1. Having general information on their websites about when clients may be charged fees.

2. When first meeting or communicating with clients and once the scope of the advice to be provided is known, providing detailed information about the income the adviser will earn if the clients use the adviser’s services.

3. Providing clients again with the detailed information about the income the adviser will earn, at the point they actually give their clients the advice.

The FSCL did not analyse how much work the broker had done for Tony and Liz as the fees had not been disclosed.

It turned out that the broker had included fees for their broking services ranging from between $2,500 to $12,000 within some – but not all – of the “policy charge/s”.

The FSCL says all the coverage summaries looked the same, whether a fee was included in the “policy charge” or not.

“No one would know, by looking at the coverage summaries, which one included a fee and how much that fee might be. We found that the broker had hidden the fees within the ‘policy charge/s’,” Taylor says.

“We did not think that the sentence about premiums possibly including a documentation fee was enough to displace the misleading impression created by the coverage summaries.

“Most people would assume that if a ‘documentation fee’ were to be included in a ‘premium charge’, that would be made clear in the coverage summary.

“And, in any event, the term ‘documentation fee’ in and of itself was misleading.

“The term ‘documentation fee’ was not sufficient to inform Tony and Liz that the broker was charging a fee for their services.

“We also thought that the broker should have drawn the possibility of charging a fee for their services to Tony and Liz’s attention clearly and explicitly, especially if they planned to rely on it to charge fees as high as $12,000 at a time,” Taylor says.

Tags: Disclosure fees FSCL insurance Insurance Advisers

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Comments from our readers

On 3 April 2021 at 2:27 pm JPHale said:
We didn't need a change to the rules for this to become egregious contract terms. Much of this was already covered under the fair trading act and the consumer guarantees act (for personal on the CGT).

This being found to be a problem the broker has to answer for has not come about because of the new rules.

That said, provided there is disclosure and the situation is reasonable, it may be that commission and fees will be charged in some situations in the future.

Provided it is disclosed and the clients understand what is going on and why. Not my approach personally.

Which already goes against one aggregator that has stated commission or fees, not both. This could mean that certain clients in certain situations won't get the advice they need, and some existing mixed remuneration situations will be problematic already with this aggregator.

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