Insurers call for replacement business rules in code

Submissions that were made during the code working group’s consultation period have been released ahead of the approval of the new code, which will apply to all advisers.

Naomi Ballantyne’s submission on behalf of Partners Life said there were significant risks in consumers replacing a financial product – such as insurance – with another.

“In these situations, a provider of financial advice should not be permitted to recommend a replacement financial advice product to a retail client unless the provider of financial advice compares the risks and benefits of the existing financial product to those of the new financial advice product, relative to the client’s personal circumstances.”

She said the only exception should be if the client proactively refused advice.

“Unless product documentation is compared by an expert, there is a risk that retail clients will not make fully informed decisions and be in a worse position with a substitute product,” she said.

“There is a significant risk of this occurring in cases of life and health insurance. For example, replacing one trauma policy for another, may mean the complete loss of cover if the client suffers a trauma condition not covered by the new policy. This is particularly relevant for cancer, where definitions of what qualifies for a claim benefit differs dramatically between policies. These differences can only be determined by analysis and comparison.”

Ballantyne said lost benefits were not the only risk – pre-existing conditions were catching clients out.

“As an example, a client has a medical policy which does not exclude ‘genetic pre-disposition’. She is recommended a new medical policy which includes such an exclusion. Because the policies are not compared, she and the adviser are unaware of the difference in cover. A few years later she is diagnosed with breast cancer and BRACA gene mutation which pre-disposes her to breast cancer. Her surgery and treatment are not covered under the new policy. It would have been covered under the previous policy.”

She said the code should also address products being replaced without advice.

David Whyte, chairman of Lifetime, said replacement business had to be managed carefully, with written documentation on the merits being provided to the client, the provider they were moving from and the one they were moving to.

AIA said there was also a gap in the standards relating to the ongoing support and servicing of clients, which the Financial Services Council said was a view shared by several of its members.

“For long-term products such as investment products and life insurance, we consider that there should be a positive obligation to provide ongoing periodic servicing and support to clients, unless the client makes an informed decision to the contrary,” AIA said.

“This should also address appropriate remuneration (trail commissions) where the clients may not be receiving adequate levels of service to warrant payment of on-going service commissions. This was a key issue identified in the Australian Royal Commission.”

But Russell Hutchinson, of Chatswood Consulting, said it could be difficult to implement.

“I am not in favour of the code requiring certain types of service, charge, or economic activity.

That was rejected by MBIE in drafting the law and if you like innovation, flexibility, and freedom, then you probably think that was a good idea. I am also concerned as to how we would define the service, at what thresh-hold level of renewal commission we might require it, and whether we might bind an adviser to a situation where they were required by the code to provide a service that was uneconomic, in the case of very small renewal commissions.

But the problem is real, as illustrated from Australia, is when a financial adviser receives a payment for no service given. Plainly, this is wrong.”

He said an alternative solution was for code standard one to include commentary making it clear that it was never fair to receive a fee or commission when no service was provided and no attempt made to do so.