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FMA Review of Adviser Conduct in Life Insurance

The Financial Markets Authority has released the report on advisers investigated for replacement business. You should read their media release, and then the full report available via this link. Or look in their media centre, and you should see it as the most recent release.

Although you should read the report in full, some points worth highlighting are:

After a substantial investigation, starting with a big data approach to identify advisers with high replacement rates, followed by individual investigations, it could be fairly said that the very small numbers of problem advisers identified means that there is no widespread problem. The FMA states in the report that this is not a representative sample - the 24 advisers were chosen according to criteria designed to identify those with high rates of replacement business.

Even so, it would not do to close the file and say that there is no problem. Most of us would be able to identify life insurance sales practices that are poor. They are not the sole preserve off RFAs either. The FMA identify four AFAs out of the total, and I am personally aware that some of the problems of replacement business are replicated in QFEs as well - one of our staff has mystery shopped several different QFEs and found that the same conflicts of interest that may motivate one adviser to qualify for travel to an offshore conference work just as well on QFE staff too - even if the scale of the incentives may be smaller.

I also feel some sympathy for the FMA, and for AFAs who have been through the process. AFAs, bound by the Code, will have had a much rougher ride. RFAs, on the other hand, not being bound by the code, probably presented the FMA with a problem. They have very limited supervision tools open to them. I bet that some of the cases they wish they could do much more than just write a letter.

On the other hand, I also know of a couple of advisers in the process who were perhaps unfairly targeted, and feel that the FMA process did not properly take into account the role of the advice business in which they work, the actual advice process they followed, and the complexities specific to some of the insurance that they were dealing with.

But this paper is not really the end of this issue. I am sure that it will have helped the FMA advance its thinking considerably. As a learning exercise it has probably been invaluable, no matter that there are no prosecutions (yet). This report underlines what it means when the FMA says it has limited tools to manage RFAs. This report may also provides a basis for thinking about setting terms for licensing financial advice providers under the new regime. I see this as a warning about what needs to be addressed in risk advice before the full implementation of the new law and new Code.

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