COLUMNS: INSURANCE

BY STEVE WRIGHT

By now, you might wonder if my articles in TMM will ever stop being about conduct obligations? The answer is ... yes, of course. This is the last one. Until we need another!

For now, the focus is on ensuring the client understands your advice, and it seems to me the obligation comes in two levels:

The first level comes from Section 431J of the FMC Act, which prohibits advisers from giving financial advice unless the adviser has taken reasonable steps to ensure clients understand the nature and scope of the advice being given and any limitations.

I interpret this to refer to an understanding of the type or nature of the advice being given at a generic level, not the actual substantive advice that is yet to be given.

At a basic level, “nature and scope” could be “advice on your life cover needs but nothing else and for no one else”, or “advice on life and disability insurance needs for all the members of your family but not health insurance and not fire and general insurance”.

It might also be wise to specifically state your advice will not include, for example: preparing wills; retirement planning; budgeting; mortgage advice; investment advice; financial planning; drafting trustee resolutions etc – unless, of course, you are going to do those things.

The client scope of service agreement is the ideal place for detailing the “nature and scope” of your advice and any limitations.

Code Standard 4 goes further than the FMC Act and states that taking reasonable steps to understand the advice “relates to the financial advice itself”.

Since the FMC Act already deals with the nature and scope, the Code, in my view, must mean the substantive advice itself, as contained in a “Statement of Advice” or similar document evidencing your recommendations.

Code Standard 4 goes on to say that understanding the advice includes the client having “sufficient comprehension” of: “the content” and “risks and consequences” of the financial advice; and “the nature of any ongoing and other services related to the financial advice”, so that they can make an informed decision about the advice, such as: “whether the advice is based on valid assumptions about the client’s circumstances”; “whether to follow the advice”; any fees and costs associated with following the advice; and “whether and when to seek additional financial advice”.

Finally, the Code indicates that the steps required by the adviser to ensure the client understands the advice will depend on “the circumstances, such as the nature and scope of the financial advice, and the skills, experience and vulnerabilities of the client”.

In most cases, I believe life insurance advice is given based on the client’s actual circumstances and if it is not, then the client must understand that this is the case.

The client must also understand the fees and costs that come with accepting your advice.

For insurance, the costs may be ongoing premiums that have to be paid, how much, how often and how these may change over time.

The Code requires advisers to ensure clients understand any need for additional financial advice. This may include other advice services the adviser can provide or those which the adviser cannot provide.

Here, I’m referring to advice on retirement planning, estate planning, investments, tax, lending, basically any other type of financial advice the adviser believes the client should take.

I think it includes ensuring the client understands the consequences of not taking the recommended advice. This is particularly important in relation to wills and enduring powers of attorney, both of which can have significant implications for life and health insurance claims.

As far as the insurance advice and recommendations go, I think this Code Standard means many people will need to put more explanation and detail into their Statements of Advice.

Probably most would agree enough information must be given to allow clients to easily understand the risks they face on death, disability and ill health and the likely associated financial consequences; the options for dealing with that risk and the nature and type of insurance and sums insured required; and the premiums payable, ongoing services and reviews and the consequences of not following the advice.

I think it will also require more attention be paid to the client’s understanding and acceptance of what they may be missing out on and the possible consequences.

Two scenarios immediately spring to mind for me here, replacing a policy and where clients are rejecting recommendations or parts of recommendations or declining options, to keep premiums down.

Advisers must ensure clients understand the negative consequences of not paying enough to properly cover their risk, or of losing benefits when: replacing a policy; and declining options (for example: early cancer benefits on trauma cover, specialists and tests on medical cover and especially inflation protection (indexing) for monthly benefits, like income or mortgage protection).

How you go about taking steps to ensure the client “understands” depends on the client and other circumstances.

Simply asking them if they understand might be a good start. You may also want to ask them questions to check their understanding is the same as yours.

Remember, there is a general duty to give the client enough information to make an informed decision about whether to accept and implement your advice.

Oh, and don’t forget to document all of this. ✚

Steve Wright has qualifications in Law, Economics, Tax and Financial Planning and is General Manager Product at Partners Life.