INSURANCE

Insurance C ode Standard 3 requires that all financial advisers give advice that is suitable, having regard adviser to the nature and scope of the financial advice. In addition, Section 431L of the FMC Act requires that advisers conduct must exercise the due care, diligence and skill that a prudent adviser would exercise in the same circumstances. These requirements effectively say: obligations: “You must know what your client is asking you to do for them, do that competently and properly, and, you part IV will be judged by the standard of the reasonable prudent adviser.” This is the minimum level of competence required. If you promise Steve Wright explains what specialist advice or superior advice or service, then a client will likely be entitled insurance advisers will need to expect a higher level of service, skill to demonstrate to clients, and knowledge, from you. and what constitutes giving “Suitability” will likely be judged on the service you have agreed to do for “suitable” advice. the client (your scope of service), the client’s needs and your associated BY STEVE WRIGHT recommendations.

Code Standard 3 obligations

The commentary to the Code Standard 3 says that suitable advice should be based on reasonable and appropriate grounds, such as those in relation to:

any strategy supporting the advice any underlying assumptions any financial advice product the client’s relevant circumstances.

The commentary goes on to say the following. “Depending on the nature and scope of the advice, a detailed analysis of the client’s circumstances may be required, or it may be reasonable to make assumptions about the client’s circumstances based on particular characteristics of the client. “If the advice includes a comparison between two or more financial advice products, the advice must be based on an assessment of each product. “An adviser can rely on another person’s assessment of a product or strategy if the adviser can demonstrate it is reasonable to rely on the other person’s assessment.” For typical life and health advice, most of the time the client’s actual circumstances are absolutely relevant and necessary. But even then, some assumptions based on the client’s characteristics may be required (like the probable incidence of disability depending on the client’s age and occupation).

Making a product comparison

The requirement to make an assessment of products where a comparison is being made will be of interest to insurance advisers, particularly where existing products are being replaced. What is required to comply?

“The requirement to make an assessment of products where a comparison is being made will be of interest to insurance advisers, particularly where existing products are being replaced.”

“It is especially important to document the reasons behind the advice recommendations, with sufficient explanations (including possible consequences).”

Does this requirement mean advisers must see the client’s existing policy document? I suspect it does because the existing policy may be several years old and different from the same product currently being issued by the existing provider. Then a fair comparison of benefits gained and lost must be clearly communicated with the client along with the dangers inherent in being underwritten again.

Relying on another person’s assessment is also worth thinking about. Asking peers for their opinions is useful for learning, but their opinions or views should not be blindly applied to every client unless they have been considered and are appropriate for that client.

Using product “rating houses” to compare insurance products also needs careful consideration, and as usual, their use must be appropriate for each client. Product comparisons can be useful for learning and comparing products. Still, they usually can’t determine suitability because they typically don’t take enough, or any, of your specific client’s circumstances, needs or wishes, into account.

Giving suitable advice is more than just recommending the right insurance product to indemnify against the risk (life cover for death risk, for example). Suitable advice goes to the product, the sum insured, the options selected or declined, the premium structure, policy ownership and any number of additional things, including specific features, terms and conditions within products, all of which will be impacted by your client’s needs.

Provider selection

“Suitability” probably also applies to product provider.

Provider selection can result in significantly different client outcomes even across “same” products (differences in benefits/claims, cost efficiency and existing cover increase and access convenience, for example). For this reason, I believe provider selection is a critical part of getting (and giving) good advice. Careful consideration needs to be given to recommending the most appropriate provider’s product or combination of products, unless you have made it abundantly clear to your client that you will only consider a limited number of providers and what the consequences of this limitation might mean for them.

Documenting your recommendation

Sometimes the reasons behind an adviser’s recommendation are not immediately obvious. In these cases, it is especially important to document the reasons behind the advice recommendations, with sufficient explanations (including possible consequences), so that the client has enough information to make an informed decision and understands the advice. Under the new Code Standard 4, advisers have a duty to ensure that clients understand their recommendations and advice, and this will be discussed in the next edition of TMM. ✚

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

The TOP 10 stories on www.tmmonline.nz

There was a wide variety of stories on TMM Online since the last issue of the magazine. Here’s what mortgage advisers have been reading.

01

SUB 2% MORTGAGES TO BOOST HOUSE PRICES

Home loan rates will plummet to 2% in the next year, with low rates set to push up house prices, according to ASB.

02

WHY MORTGAGE RATES ARE LIKELY TO FALL EVEN LOWER

Home loan rates are already at record lows, but economists at ASB predict interest rates will plummet even further in the coming months.

03

ANZ EASES SERVICING TEST

ANZ has become the latest bank to ease its servicing test criteria for borrowers, reflecting the lower interest rate environment.

04

NEGATIVE OCR ON THE WAY ASB AND ANZ

ASB and ANZ have revised their forecast for the official cash rate and predict we will get negative rates next year.

05

NEGATIVE OCR IN APRIL 2021: WESTPAC

The Reserve Bank will still need to slash the official cash rate to negative territory next year, despite a better-than-expected recovery from the Covid-19 pandemic, according to Westpac economists.

06

TURNAROUND TIMES DETERIORATE

Turnaround times "seem to have got worse" following Covid-19, according to a new survey conducted by economist Tony Alexander.

07

WESTPAC LOAN PROCESS GETS THE THUMBS UP

Westpac's decision to process third-party loans in-branch has been a success, leading to improved turnaround times, advisers say.

08

ASB EASES SERVICING CRITERIA

ASB Bank has eased its lending servicing criteria after cutting home loan rates for high LVR borrowers last week.

09

SERVICING TESTS HINDER HOME LOAN MARKET

Tough servicing tests continue to hinder the home loan market, leaving borrowers unable to tap into attractive headline interest rates.

10

ASB CUTS RATES FOR HIGH LVR BORROWERS

ASB Bank will no longer charge high LVR borrowers a higher interest rate, promising to offer the same price "irrespective of equity levels".

TMM Online also has all the latest mortgage rates and changes. www.tmmonline.nz