AFA Sees FSC Churning Paper as an Opportunity

In particular, Kilpin described underinsurance as “the elephant in the room,” noting that too many people were uninsured, underinsured or covered by the wrong kind of insurance.

Kilpin thanked the FSC for inviting industry comments on the paper, expressing the hope that it would allow for “a bigger picture debate.” At the same time, he said that the FSC’s focus on churning was misplaced. “Churning is rare and limited to a few isolated advisers,” Kilpin said, not a systemic problem.

He therefore recommended that attention be focused on the few advisers who churn and that, once the practice was more clearly defined and the extent of the problem measured, insurers should be involved in eliminating the problem. In part, he said, the application of the Best Interests Duty, incorporated into reforms included in the Future of Financial Advice (FOFA) legislation, would highlight the importance of identifying material benefit to the client when clients change policies.

The AFA’s response included several specific suggestions:

• Insurers should be allowed to share information that would help to identify instances of churning, leading to the implementation of a watch list of potential churners.
• The advisers’ Code of Ethics should be revised to include an obligation to document client benefits when a replacement policy is among the adviser’s recommendations.
• Insurers should be able to review the adviser’s documentation and, if the circumstances warrant, obtain additional information sufficient to confirm a “net and material benefit” to the client.

To address churning, FOFA would require commission refunds for policies terminated within two years of origination and limitations on commissions when clients change policies within five years. Kilpin hopes that the FSC paper will open the door to meaningful collaboration among industry participants, resulting in “better outcomes for consumers and a better deal for all stakeholders.”

He reaffirmed the conclusions of the AFA’s 2011 research report, “Risking Everything,” which underscored the importance of advisers in helping clients to make the best financial decisions. That role, according to Kilpin, is particularly important in today’s insurance environment, an environment characterised by chronic and widespread underinsurance. When consumers have the benefit of reliable advice, he said, “Their levels of cover are more realistic and they better understand the benefits of cover.”