The recent Financial Markets Authority (FMA) investigation into life insurance sales practices of 11 groups has highlighted the need for better consumer data, a leading industry consultant says.
In an analysis of the just-published FMA report, Russell Hutchinson, director of insurance specialist firm Chatswood Consulting, says that quantifying “how much [consumer harm from poor sales practices] and the impact on customers would help a lot in determining priority, and how to fix it”.
Coincidentally, last week the FMA’s Australian counterpart revealed it was pushing ahead with plans to improve consumer outcomes data across the financial services industry.
Peter Kell, Australian Securities and Investments Commission (ASIC) deputy chair, told an industry gathering last week that the regulator had embarked on several “recurrent” data collection projects covering a wide range of financial products including life insurance, mortgages and managed funds.
Rather than “traditional disclosure” from providers that has “not worked in many areas”, Kell said “we need more readily available, industry-wide data on how products and services have actually performed, not just what they promise”.
For instance, he said ASIC and fellow regulator, the Australian Prudential Regulatory Authority (APRA), were working “on a major project to deliver insurer level data on life claims outcomes”
“There has not been readily available public data on life insurance claims outcomes. Yet for consumers this is a key measure of the performance of their insurance product,” Kell said. “What percentage of claims are paid or denied? How does that vary across different product types? How does that vary across insurers? What trends are we seeing over time?”
However, Liam Mason, FMA director of regulation, said the thematic review of life insurance ‘replacement business’ practices at 11 ‘qualifying financial entities’ (QFEs) published last week did not identify any specific consumer harm.
“This wasn’t a deep level dive into client files,” he said. “But QFEs are in a privileged position of managing large numbers of advisers. They are obliged to have processes and safeguards to make sure advisers are acting in the best interests of consumers.”
Notably, the FMA report says three currently anonymous large NZ financial institutions caught short by a recent regulatory investigation could face censure, direction orders or changes to their licence conditions – plus a “small” administrative fine.
Mason said the three QFEs earmarked for further attention post the review would have a couple of months to consider the regulator’s concerns before any punishment was finalised.
He said the FMA could impose either a “public or private” censure or direction orders – detailing specific remedial actions – if it decides to follow through on regulatory charges against the three firms identified in the review as “not meeting [their] legal obligations”.
However, Mason said the FMA could only levy a small fine to recover administrative cost rather than seek heavy punitive financial redress if it decides to pursue the three firms further.
The FMA is also conducting a review of bank sales incentives – sparked by the ongoing Australian financial services Royal Commission – due to be published before the end of this year.
Most of the 11 QFEs selected for the original FMA review fell short of life insurance replacement business best practice, the report released last week says.
“We are concerned that the conflict of interest presented by QFEs manufacturing and selling insurance sets advisers up to fail in complying with their obligations,” the FMA report says. “Even if most QFE advisers do not receive commissions, they are incentivised through key performance indicators or sales targets, which ultimately leads to similar outcomes for the customer.”
The 11 targeted firms included five big brand life insurers (AMP, Asteron, Cigna, Partners Life and Sovereign), AA Life – an Asteron re-seller, two specialist market suppliers – Farmers Mutual and the Medical Assurance Society, and three banks – ANZ, BNZ and Westpac.
Some of the “poor practices” identified by the FMA include lack of QFE oversight of life sales, inconsistent labeling and monitoring of replacement business, and erratic follow-up processes where a breach has occurred.
“During the period, six entities identified a total of 403 instances where action had been taken based on insurance replacement business,” the report says. “A total of 67% of these represent administrative errors related to replacement business and the remainder relate to actual adviser conduct issues.”
Hutchison says while the FMA notes the industry struggles to even define ‘replacement business’, the regulator “doesn’t appear to want to enter into the comment, let alone guidance, about the definition”.
Mason said the FMA was unlikely to impose a definition or require firms to use standardised life replacement forms such as a template published by the Financial Services Council (FSC).
He said the latest review would not result in further recommended changes to the Financial Services Legislation Amendment Bill (FSLAB) currently before a parliamentary select committee.
FSLAB will shift the entire financial advisory industry to an entity-licensing model similar to rules how the 53 QFEs operate today. The in-progress law – expected to come into force next year – will also capture the 7,000 registered financial advisers and 21,500 QFE advisers under code of conduct and competence standards that currently apply only to the 1,800 or so authorised financial advisers.