When reviewing a Statement of Advice (“SoA”) which recommends a product switch/replacement advice, our Compliance team will assess the appropriateness of the recommended switch against the following considerations:

  1. Due consideration of the existing policies

    What does this mean? Has this been effectively demonstrated?

    Before recommending advice to switch or replace a client’s existing product, a Financial Advisor is expected to consider the existing product and expressly state that the existing product has been considered, in their SoA.

    One way to demonstrate that you have duly considered a client’s existing cover, is to obtain alteration quotes to adapt the existing cover to your recommendations.

    Rather than switching policies, adapting the existing policy may better suit the client. This is because adapting the existing policy may reduce or remove the risks that would arise where a new policy to be implemented.

    This is further discussed here: Chapter 9 – switching risk insurances.

    You will also need to be able to demonstrate what the premium would be for a like-for-like cover with the existing insurer.  If it is cheaper to retain and alter the policy, then you will need to provide an explanation in your SoA to substantiate your recommendation to switch. If it is more expensive, you will still need to demonstrate that the existing policy has in fact been considered, by obtaining alteration quotes to demonstrate that you have considered adapting  the existing cover to match your recommendations.

  2. Material cost savings

    Does your recommendation to switch provide your client with material cost savings?

    Advice will often be appropriate if the switch will result in an overall cost savings for the client. This is entrenched in legislation and regulation. However, to manage the conflict of interest which inherently arises as a result of commissions receivable, the cost savings have to be material to a client’s circumstances.

    As a rule of thumb, Dover will consider a cost savings of 20%, as being a material cost savings for a client. This would mean that after having considered altering/adapting your client’s existing policy to match your recommendations, the switch would provide your client with a cost savings of 20% against the like-for-like comparison.

  3. Pre-existing health conditions

    Does your client have any known health issues? Are you recommending a switch where your client is over 50?

    The default position where a client has known health issues, should be to retain their existing cover and adapt the cover to suit their needs. For example, reducing the sums insured or increasing the sums insured, as appropriate. This is especially where the client has held their existing policies for more than 3 years. The rationale for this is simple – the high likelihood of exclusion or loadings imposed on the recommended polices.

    In summary, you should not be recommending a switch where your client has known health issues. If you do, special care needs to be taken to substantiate why it is in your client’s best interests to switch despite the risks and consequences, and this needs to be documented in your SoA. For example, the operation of s29(3) of the Insurance Contracts Act 1984 (Cth) represents a significant risk to clients where product replacement advice is given. It means that an insurer can avoid a policy within three years if the insured person fails to comply with the duty of disclosure.  

    In the event that your client does not have any known health issues, the likelihood of health issues is inherently higher where your client is over 50. The probability of a risk insured event is also higher. You will need to substantiate in your SoA, how your client will be better off as a result of your advice to switch policies, despite the many disadvantages of switching. These are discussed further here.

  4. Incomplete personal or financial information

    Is your advice to switch based on incomplete personal or financial information?

    Special care needs to be taken where providing replacement advice when a client has provided you with incomplete personal or financial information. A warning to this effect is not sufficient. RG 175.386 expounds that an advice provider must make reasonable inquiries to obtain complete and accurate information about a client’s relevant circumstances.

    It is important to note that the disclosure of a warning in an SoA, does not relieve an advice provider from the obligation to make reasonable inquiries, act in the best interests of the client or provide advice that is appropriate.

    Consequently, you should be adequately satisfied that you have made reasonable inquiries about your client’s circumstances and you must be able to demonstrate that you have made these inquiries. It stands to reason that you should not provide replacement advice if you cannot demonstrate this since you would not be able to substantiate how your advice is in your client’s best interests.

Rules of thumb for advising normal risk insurance clients

In Practice Note 8 we posited one simple rule of thumb we believe advisers should follow to help show ASIC their risk insurance advice was in their client’s best interests. This rule of thumb pertained to a correlation between sums insured and premiums against specific measures set for a client’s age, income and smoking status.

In addition to this rule, our Compliance team will also measure the appropriateness of risk insurance advice against the following rules of thumb:

  1. the cumulative premiums recommended do not exceed 7% of a client’s income or joint income where the clients are a couple;
  2. that the premiums within Super, do not exceed 75% of each respective client’s SGC entitlement or total concessional contributions into Super;
  3. the switch will provide your client with a 20% cost savings at the minimum.

Our Compliance team will also require the submission of a needs analysis with every SoA submitted which provides advice on risk insurances. This is a mandatory document, and our team will not commence a review of your SoA until this and all other documents required for a review per Dover’s policy, have been submitted.

The rationale for this is simple, a needs analysis is the basis for which your advice has been formulated. It effectively illustrates the ideal amount of cover which your client would need in relation to their circumstances. It also illustrates the budget compromise pursuant to the discussions you have had with your client.

Optional documents to be submitted with your SoA where your recommendations do not meet the rules of thumb outlined above include, but are not limited to:

  1. a cash flow analysis;
  2. alteration quotes where recommending a switch (this should be a like-for-like comparison;
  3. comparison quotes; and
  4. files notes.

Summary

It is important to note that the above guidelines and documents are not an exhaustive list. Even where the documents to be submitted are optional, they should still be available in your client file in the course of providing risk insurance advice, as documented in Practice Note 14.

The Compliance process is a robust and dynamic one which must adapt in line with legislation and regulation changes and/or updates.