Insurance advisers cop greed warning
Four financial advisers have been given warnings following a probe into whether sky-high life insurance commissions and allexpenses paid overseas trips are hurting consumers.
The Financial Markets Authority (FMA), which conducted the probe, also found some advisers were not aware of their legal duty to give sound advice to people seeking insurance to protect their families in a crisis.
‘‘Half of the advisers we reviewed were either not aware of the obligation, under section 33 of the Financial Advisers Act 2008, to exercise care, diligence and skill, or they were in breach of that obligation,’’ said Liam Mason, the FMA’S director of regulation.
The four advisers might have faced more than a warning, but the breach is not a criminal offence.
The probe into the businesses of 24 advisers was part of an investigation begun in 2016, prompted by FMA concerns that huge commissions were resulting in what is known as ‘‘churn’’.
Churn is where insurance advisers move clients from one insurer to another to earn commissions of up to 230 per cent of the first year’s premium, and other incentives. That can not only inflate premiums, but also expose policyholders to risk.
If people accidentally fail to disclose something material to their new insurer, claims may be declined.
People being switched between insurers may also get more limited cover thanks to exclusions for preexisting conditions, standard 13-month suicide exclusion on new policies, and ‘‘stand-down’’ periods where no claims can be made for the first weeks or months of a new policy coming into force. Horror findings
The FMA said there were ‘‘consistent themes’’ among the advisers it reviewed:
❚ poor record keeping;
❚ a lack of awareness of care, diligence and skill obligations and the need to manage conflicts;
❚ no records of product comparisons being provided;
❚ some client files showed no evidence of disclosure statements being provided to clients;
❚ poor attention to needs analysis; ❚ no evidence of scope of service agreed with clients; and
❚ no records of advice provided.
The 24 advisers were not representative of the wider adviser community.
They were chosen based on the high levels of ‘‘replacement’’ business they did in a period spanning 2011 to 2016, and whether they were particularly active during periods when insurers were offering overseas trips to places like Las Vegas as sales incentives.
None of the advisers were named by the FMA.
The median length of time their clients had held policies before being switched to a new insurer was between two and three years.
The review covered both register financial advisers (RFAS) and the more highly-qualified, and highly-regulated authorised financial advisers (AFAS).
AFAS are held to minimum competence standards and a code of conduct, whereas RFAS are not.
Unlike AFAS, RFAS are not legally required to put their clients first, disclose how they are paid, or any conflicts of interest.
That’s all set to change, with Parliament considering an amendment bill that would ditch the RFA model and require all financial advisers to meet minimum standards of competence and conduct, as well as giving the FMA more powers to stamp down on misconduct.
As well as issuing four private warnings the FMA issued compliance letters to six RFAS and one AFA. Inquiries into three AFAS and two RFAS continued, Mason said. ‘‘The upfront commissions that New Zealand providers are paying are high by international standards.’’
The International Monetary Fund has criticised the ‘‘unsustainability’’ of high commissions, and called for stronger conduct standards for insurers.
Richard Klipin from the Financial Services Council (FSC), the lobbying body for life insurers, welcomed the report but urged perspective on its findings.
‘‘There are many thousands of advisers in New Zealand who get up every day to do the right thing by their clients,’’ he said.
Consumer Affairs Minister Kris Faafoi has announced a review of life insurance contracts, citing concerns that accidental nondisclosure is leaving families unable to claim on their policies.