Claire Wivell Plater

The Australian Securities and Investments Commission (ASIC) will analyse life company records in order to find advisers who churn, according to Claire Wivell Plater, Managing Director of The Fold Legal.

“It is pretty clear that ASIC would have liked to see life insurance commissions banned as part of the Future of Financial Advice reforms,” Ms Wivell Plater said. “Because they weren’t, ASIC has to find other ways of rectifying the high levels of churning its shadow shopping uncovered.”

Data from life companies is a good place to find out which advisers have high instances of product replacement, said Ms Wivell Plater. “ASIC will be looking at the typical longevity of policies and how often they are ‘upgraded’,” she said. “This will provide a pretty targeted indicator of which advisers are engaging in inappropriate switching.”

Ms Wivell Plater warned that ASIC will no longer be investigating advisers at random. “The regulator will be conducting an investigation to specifically expose advisers who churn. There will no longer be anywhere for churners to hide,” she said. “Some of these advisers may believe they are honestly doing the right thing for their clients and in some cases, they may be. But that’s a judgment call that ASIC will now make.”

And just because advisers are taking hybrid or level commissions instead of up front commissions, doesn’t mean the issue ceases to exist. “If an adviser takes over a client from another adviser, the best they could get if they continue an existing policy would be a small trail commission,” she said. “So hybrid and even level commissions can still incentivise advisers to churn, although obviously, to a lesser extent than full upfront commissions.”

According to Ms Wivell Plater, even if recommendations to replace a policy are appropriate, there is still a high risk that the adviser’s disclosure won’t be adequate, if ASIC’s March 2012 shadow shopping study of retirement advice is any guide. “The study found that nearly half of the switching recommendations inadequately provided the required information about the recommendation to change,” she said.

Advisers need to be reviewing their business practices now to ensure their life advice practices truly put the client first. Ms Wivell Plater said advisers should:

• Develop a Product Replacement Policy that clearly explains the circumstances in which they can recommend how existing insurance products can be replaced
• Review their Statement of Advice template to ensure that they are compliantly explaining the implications of switching

“The common industry practice of incorporating system-produced product comparisons, with little else, is not adequate,” she said.

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