Draft Future of Financial Advice (FOFA) regulations designed to curb a non-existent churning culture will penalise advisers who act in the client’s best interests, according to Synchron.
“On the one hand, FOFA demands advisers act in the best interests of clients but on the other, where acting in the best interests of the client involves moving them from one insurance product to another, the regulations label advisers churners and penalise them for it,” said Synchron Director, Don Trapnell.
The draft FOFA regulations relating to churning which are now under consideration include:
- A two-year commission responsibility – if a client terminates a policy within two years, the adviser will suffer substantial write-back of upfront commission
- Level commissions for re-written policies – advisers who move clients on a like-for-like basis from one insurance company to another within five years will be forced to accept level rather than upfront commissions.
“I don’t think there is a professional adviser out there today who has not reassessed a client’s situation within five years and made some recommendation where it has been appropriate to do so,” Mr Trapnell said.
“It is an adviser’s job to do this and in fact, under FOFA, there will be a financial penalty if they don’t.”
However, Mr Trapnell said the way the draft legislation is slanted presupposes that advisers who move clients from one insurance company product to the product of another insurance company are ‘churners’, out to financially benefit only themselves.
“This presumption is quite simply wrong and seems to have been predicated on a move from the Financial Services Council in its representations to the Minister for Financial Services,” he said.
“Over the past few years, all the life companies have had a very strong push to try to reduce their lapse rates and increase their rates of retention of the policies on their books. To aid them in this cause, the FSC appears to have taken statistics relating to lapse rates to the Government and convinced them that they are evidence of adviser churning.”
Mr Trapnell said that life insurance companies count any policy that discontinues, for any reason whatsoever, as part of their lapse rate, including policies which have run their course and, in the case of one life insurance company, death claims. “Policies which lapse for these reasons cannot possibly represent churning because they are not re-written,” Mr Trapnell said.
Mr Trapnell also argued that life company actuaries are making unrealistic assumptions on retention rates in order to keep the cost of premiums down in what is a fiercely competitive environment.
“When these unrealistic rates of retention aren’t met, life companies blame advisers for churning,” he said.
Mr Trapnell said Synchron had approached the four major life insurance companies to provide statistics on churning and none was able to furnish any meaningful evidence of the practice.
“We believe the FSC’s views on the topic of churning are ill-placed and wrong,” Mr Trapnell said.
“And yet, the Government seems likely to press ahead with regulation. Regulation which will unfairly penalise honest advisers who act in the best interests of their clients, in order to combat a problem which we believe simply doesn’t exist.” Synchron is one of the largest and fastest-growing non-institutionally owned licensees by adviser numbers in the country.
