FMA scrutinises code compliance for Authorised Financial Advisers

The Financial Advisers Disciplinary Committee (Committee) has issued two decisions, FMA v A and FMA v B, which highlight the need for Authorised Financial Advisers (AFAs) to take care when selling “replacement” insurance business. We also provide the summary of facts for FMA v A and FMA v B.

Replacement insurance business has been a particular focus of the FMA in recent years, and refers to the sale of a new insurance policy (with the same or a new insurer) to a client, rather than renewing their existing insurance cover.

Because an AFA may receive commissions for selling a new insurance policy, the sale of replacement insurance creates a conflict of interest and can lead to the sale of insurance which does not best suit the client’s needs.  The issue of a new policy also increases the risk of inadvertent non-disclosures (which can lead an insurer to avoid cover), and may re-set waiting periods that apply before a claim can be made.  Such issues may not be discovered until a client attempts to make a claim on their policy and have that claim declined.

A and B came to the attention of the FMA when they were identified as having high levels of replacement business throughout the period from 2011 to 2015.  The investigation that followed identified a number of deficiencies in their conduct when placing this insurance, and they were censured for breaches of their Code of Professional Conduct (Code).

Key findings

Following its investigation of A and B, the FMA identified failures in selling replacement insurance to:

  1. explain to clients the underlying risks of changing insurance providers;
  2. undertake a comprehensive comparison of the key terms and benefits between the existing policy and other available policies, and discussing the same with the client;
  3. provide appropriate premium comparisons, including updated premium comparisons to allow for the passage of time since the making of a recommendation and placement;
  4. appropriately use the “execution only process” (which involves the signing by the client of an acknowledgment that no advice was given and that the AFA’s liability is limited). This process had been used in circumstances where there was no clear justification for not giving any advice or where advice was in fact given; and
  5. keep detailed file notes of conversations and meetings when providing advice and recording that key matters (such as reductions in the overall level of cover) were agreed to by the client.

These failures amounted to breaches of the Code.

Our View

Replacement insurance cover is obviously a hot topic for the FMA.  These decisions provide good guidance on what appropriate conduct looks like under the Code.  If proper processes are not followed, and adequate records kept, AFAs may find themselves the subject of regulatory action.  Those selling insurance cover should review their practices to ensure that they are satisfying the standards set out in these decisions.

If you have any questions in relation to disciplinary proceedings before the Committee, regulatory compliance in relation to the FMA, or any aspects of insurance law more generally, please contact one of our experts.

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