FSC’s churn paper an opportunity to address the elephant in the room

Industry discussions following the Financial Services Council (FSC)’s Consultation Paper on Replacement Business Framework (the FSC Paper), provide an ideal opportunity to open up discussion on how to address one of the most important issues facing advisers and their clients, according to the Association of Financial Advisers (AFA), namely, sustainable insurance which will help correct the chronic levels of underinsurance in Australia.

“The elephant in the room really is the fact that not enough people have lifeinsurance, have the right kind of insurance and/or have enough insurance,” said AFA CEO Richard Klipin.

“We congratulate the FSC for inviting industry discussion on current adviser practices and adviser remuneration and for paving the way towards a bigger picture debate.”

Mr Klipin said that all parts of the advice value chain, including product providers, insurers, licensees, advisers and professional associations share a collective responsibility to deliver a growing and sustainable industry.

“The industry’s focus needs to be on supporting consumers to manage their risks,” he said.

On the issue of churning, raised in the FSC Paper, Mr Klipin said that while the practice exists, there is no evidence to support that it is widespread or systemic.

“Churning is rare and limited to a few isolated advisers,” he said.

“While it’s important to stop the practice, action should be focused upon those advisers who churn, rather than the whole financial advice industry. It is also important that weclearly define what churn is and start to measure it.

“We believe that the introduction of the Best Interests Duty under the Future of Financial Advice (FoFA) legislation will highlight the importance of only moving clients from one policy to another where there is a net and material benefit to the client. But we also believe insurers have an important role to play in eradicating the practice of churn.”

The AFA’s suggestions for addressing churn include:

Application Form Declarations

Life insurance application forms could be updated to include a declaration from the adviser that the replacement policy represents a net and material benefit for the client. As insurers are best placed to identify churn patterns, it could be the insurer’s responsibility to ask the adviser for more evidence of the net and material benefit, if required.

Watch List

As far as Privacy Legislation allows, insurers should be permitted to share information to establish who the churners are and create a ‘watch list’ which is available to key industry stakeholders.

Code of Ethics

The financial advice industry Codes of Ethics should be updated to include an obligation on advisers to demonstrate and explain, in any advice document, the delivery to the client of a net and material benefit. An enhanced Code of Ethics should also apply at the product provider level.

The Future of Life Insurance

“The FSC Paper presents the industry with an opportunity to perform at its best,” Mr Klipin said.

“It is an opportunity to confront the big issues and take a collaborative approach which focuses on better outcomes for consumers and a better deal for all stakeholders.

“As identified in the AFA’s groundbreaking 2011 research, Risking Everything, advisers help clients make better decisions around their financial futures. Their levels of cover are more realistic and they better understand the benefits of the cover.”

16 July 2012