Dover’s 2016 “Compliance is a State of Mind” CPD days are in full swing. We have more than 100 advisers attending in Melbourne in May 2016 and more than 100 advisers attending in Sydney in June 2106.
Nearly 30% of the attendees are not Dover advisers. They are advisers with other AFSLs who have heard about Dover’s “Compliance is a State of Mind” CPD days and have invited themselves along.
They are more than welcome. Let me know on firstname.lastname@example.org if you and your team want to come along. You are more than welcome.
The CPD days are all about compliance
The CPD days are popular: Dover is virtually the only AFSL where financial planners are encouraged to learn about compliance problems as a way of improving the quality of their advice to clients. We go over Dover’s compliance processes, we look at what ASIC is saying about SOAs, we look at what FOS is saying about SOAs. Problem cases are detailed and discussed. The best interests duty, the appropriateness of advice rule and the priority of interest rule are white-boarded out, with a large number of practical case studies.
The theme is “Compliance is a State of Mind”, and we focus on ways you can provide better and more compliant advice to your clients. Good compliance is good practice.
You can learn more about Dover’s annual CPD days here: Dover’s 2016 CPD days.
ASIC’s views on risk insurance SOAs
As should be the case, our CPD days feature ASIC’s 2014 Report 413 Review of retail life insurance advice. This report summarizes ASIC’s 2014 study into 204 statements of advice created by prolific risk advisers from prolific risk AFSLs. It should be read by every financial planner, as a guide to what ASIC expects from risk insurance advisers.
Report 413 is poor science: the SOA sample is not randomly selected. ASIC deliberately selected prolific risk advisers from prolific risk AFSLs, unsurprisingly found 37% of their SOAs were flawed, and then concluded 37% of all SOAs are flawed. The extrapolation of its findings across our profession is obviously questionable logic. Its like saying “we found some ASIC staffers abuse sick leave, therefore all ASIC staffers abuse sick leave”; and many good advisers find ASIC’s extrapolation offensive.
You can read more about Report 413 in Fifty Ideas Take Your Risk Practice From Good To Great.
Report 413 still has value for advisers. It helps us understand ASIC’s views on what a good financial planner should be doing, and that’s the approach Dover takes to it. Studying Report 413 provides further insight into how you can you can take your risk advice practice from good to great.
Michele’s advice: make no mistake, its a bigger mistake
Part D of Report 413 is instructive. It showcases a miscellany of mistakes made by the sample group, ie risk prolific advisers from risk prolific AFSLs.
Michele’s case features as one example of their poor advice, and is reproduced here:
Case study 1: Post-FOFA advice that failed to comply with the law
Michelle is 50 and married. She is employed full time and earns $56,800 per annum. There was no information about Michelle’s spouse or dependants on her file.
Michelle jointly owns a home valued at $800,000 and an investment property valued at $500,000. She has a cash account of $10,000, but she has no other cash savings or investments. Michelle’s superannuation balance is $80,000.
Michelle has mortgages totalling $600,000 on her home and investment property.
Michelle has life and TPD cover of $406,000 and trauma cover of $100,000. Her current annual premium is $1,676, with $502 paid from her super benefits and the balance of $1,174 from her personal cash flow.
Michelle wants her life cover to be paid from her super benefits and not from her personal cash flow.
The adviser recommended that Michelle increase her insurance and take out life cover of $588,100, TPD cover of $578,100, trauma cover of $667,469, and income protection cover of $3,879 per month, with a 30-day waiting period and a benefit payment period to age 65.
The new total annual premium was $10,772, of which $5,353 was paid from Michelle’s super benefits and the balance of $5,419 from her personal cash flow.
The commission was 110% or $11,849. This was a gross figure less fees payable to the AFS licensee.
The advice to Michelle failed to comply with the law:
- The $5,353 annual premium for the life, TPD and income protection policies that Michelle will pay from her super benefits exceeds Michelle’s super guarantee contributions of $5,254 per annum.
- Although the assets are jointly owned, the adviser did not identify her spouse’s personal details (age and employment status or income). Without this information, the adviser cannot demonstrate why the insurance recommendations are appropriate and in Michelle’s best interests.
- The adviser did not consider retaining her existing life insurance cover in her superannuation where the premium is cost effective.
- The $5,419 annual premium for the trauma policy that Michelle will pay from her personal cash flow represents 9.5% of Michelle’s gross income. This is a large financial commitment, particularly when it is unclear from the file how necessary and appropriate this insurance cover is for Michelle.
- The advice did not address Michelle’s stated objective, which is to reduce the impact of her existing premium on her current personal cash flow.
Is ASIC correct?
ASIC is correct. But ASIC is probably not correct enough. Its analysis, or if you prefer, its criticism, does not go far enough. Michele’s advice is an even bigger mistake than ASIC realises.
Michele’s advice is patently inappropriate: any advice that costs an amount equal to 20% of a client’s pre-tax income is by definition inappropriate and not in the client’s best interests, in the sense that she is better off because of the advice. This concept of “better off” is the essence of RG 175’s commentary on these matters, and ASIC’s rule of thumb for judging the appropriateness of advice.
More specifically, Michele’s SOA breaches the rule in section 961J of the Corporations Act that advice must prioritize the client’s interests over the adviser’s interests. But the advice breaches more than just the prioritisation rule. It also breaches the rule in section 961B of the Corporations Act that advice must be in the client’s best interests and the rule in section 961G of the Corporations Act that advice must be appropriate to the client.
Michele’s SOA also breaches the adviser’s general law duty of care, a separate, broader, and over-lapping duty to do all things expected of a reasonable financial planner. This general law duty is not limited to advice and covers all aspects of the financial planner-client relationship.
You should refer to our Friday Reflection on 15 January 2016 dealing with Can a churn be in a client’s best interests? for comments on the interplay of the various statutory and general law duties. In summary, we tend to think of these duties as a single compendious rule. Breach one and you breach them all. But this is an unnecessarily restricted view; they can be breached independently.
If you are interested in learning more about what the advice should have been, and the sort of issues the adviser ought to have covered, we refer you to chapter 9 of part 21 of the Dover Way, which deals with ASIC’s requirements when switching risk insurances. This can be accessed here switching risk insurances.
Has Michele been left in a materially better position?
In summary, here there is no evidence the advice will leave Michele in a materially better position. In fact the evidence is to the contrary: to shows Michele is in a materially worse position. She has paid too much for her insurance and may have an inadequate product on her hands.
Michele’s advice is nothing more than a crude and obvious churn. That is, a recommendation to replace an old insurance product with a new insurance product for the purpose of generating a commission for the adviser, and with no material benefit for the client. The advice is not in Michele’s best interests, it is not appropriate to her and it does not prioritise her interests.
The advice also breaches the adviser’s general law duty of care to Michele.
The contravention report, the rectification process and Michele’s damages
The Corporations Act creates a statutory principal and agent relationship that makes the AFSL responsible for the actions and omissions of the adviser. This statutory agency overlaps a similar general law agency identified by the courts in the Financial Wisdom case.
Report 413 does not name the adviser and the AFSL responsible for Michele’s advice. ASIC hints investigations are continuing, but does not say more. Its probable the file has been closed: ASIC’s investigations fell significantly in 2015, according to its annual report, so who knows what happened.
The AFSL is presumably aware of ASIC’s view on its advice. The AFSL should have lodged a contravention report with ASIC, and rectified its breach of the Corporations Act.
The AFSL also should have investigated whether this was a systemic breach, or a mere isolated breach, and if it was a systemic breach instigated a rectification program for each other client too.
A failure by an AFSL to report a contravention is a further, secondary, contravention of the Corporations Act which, in turn, must be reported to ASIC. It’s a never-ending cycle of breach on breach.
Contravention reports must stipulate rectification.
Hopefully, effective rectification has been completed, at no cost to Michele. The starting point is a refund of her excess premiums. To be frank, its probably not much in dollar terms.
But even if the excess premiums are refunded, Michele may still have further much larger damages. And we may not learn of these for years or even decades. Perhaps the new policy is deficient in ways the old policy was not? Perhaps Michele has developed a health condition not covered by the new policy, but which would have been covered by the old policy under the three-year disclosure rule in sub-section 29(3) of the Insurance Contracts Act, and will manifest in say ten year’s time.
The consequences of the negligent advice, this churn, the failure to act in the client’s best interests, to provide appropriate advice and to prioritize Michele interests will not be known for many years.
It all depends on what happens over the policy’s life, and over Michele’s life.
A complaint to FOS?
The potential risk to the adviser and the AFSL lasts longer. This is because Michele has six years from the day she first becomes aware that the adviser was negligent to lodge a complaint with FOS.
So, if in 2024 Michele learns the new policy does not cover a claim covered by the old policy, she has until 2030 to lodge a complaint with the Financial Ombudsman Service.
So, we wait and see.