Discussion point: personal liability for senior managers of insurance companies

In MBIE's recent paper on conduct of financial institutions one option, which is included in the preferred options package, is to extend personal liability to senior managers of insurance companies. 

Why is personal liability considered a useful tool? 

Reasons are presented in MIBIE's paper (which you can download here, and review yourself), however, in summary, there are two concerns.

The first, given most time in the report is the concern that managers may suffer from incentives to take better care of the insurer's interests than the client's - especially, perhaps, at claim time. 

The second, which is not in the report is, perhaps a legacy of some of the collapses in finance companies that occurred during the global financial crisis. Some directors claimed that they were not informed by senior managers. 

In both cases you can imagine how a personal liability could tip the scales towards behaviour more in the interests of the consumer and society as a whole. 

How would this work? 

There are some significant challenges in applying such an option. It is present in the Financial Market Conducts Act, and has also been included in the Credit Contracts Legislation Amendment Bill. Combined with its presence in the preferred options package, you should assume it is more probable than merely possible. Both the FMCA and the CCLA Bill prohibit insurance of the penalties. 

What are the downsides? 

These provisions could apply to many people. They may either be unwilling to shoulder such responsibilities, or they may require additional compensation in order to do so. Both outcomes seem likely to add significant cost. 

More information:

Any current subscriber to the Chatswood Quarterly Life and Health Sector review is welcome to my initial notes on reviewing both the conduct of financial institutions and insurance contract law papers. 


Court agrees case may proceed against insurer and adviser

Liz McDonald at The ChristChurch Press picked up this story (click here to read more).

After Janine Brinsdon's house suffered $350,000 worth of damage during the Christchurch earthquakes, she decided to take on her insurance adviser and insurance company, claiming that her house was under-insured. Although Vero and Graeme Beazley attempted to dismiss the claims of providing defective advice, claiming that it was outside the six-year limitation period, the high court has ruled that the case can proceed.

Brinsdon replaced her existing full repayment cover policy with her current policy in 2001. When insuring her house, Vero had concluded that her insurance would pay a maximum of $223,143, less the amounts paid by EQC. Brinsdon claims that she was unaware that she was not completely insured until Vero made an offer in 2015.

Associate Judge Peter Andrew has stated that the policy wording is misleading, claiming that a reasonable person would have assumed that the insurer would pay the full amount of the cost of replacing the house. Furthermore, he has said that it is fair to conclude that the defendants knew that Brinsdon was unaware of the scope of her cover and that she was not advised when renewing her cover in 2010.

Brinsdon is seeking to hold Beazley accountable for breach of contract as she believes that he did not take the reasonable care. Beazley argues that there is no basis of claiming that he had an on-going duty to her. In defence to the claims made by Brinsdon, Vero stated that they also did not have on-going obligations, especially  since Brinsdon had not sought advice.

The case raises numerous questions for the advice process, the role of the financial adviser, and the perceptions of clients. Many clients probably assume an ongoing obligation of service when none has been specified or contracted with their adviser. Consumers are probably unfamiliar with the distinction between meeting an adviser, and actually obtaining financial advice. Also, this case appears to raise questions not just under financial advice law, but also under consumer protection law. The question of whether the insurance was fit for purpose has been raised. This is particularly interesting given the recent options paper released by MBIE on the conduct of financial institutions. 



MBIE conduct of financial institutions options paper

For those of you who have spent the latter part of your weekend reading and making notes on the options paper, just know that you were not alone. If you have not yet had the pleasure, you can always download your copy here. I have been unable to locate the link at MBIE's site either for this, or the paper on insurance contract law referenced in the document. 

Download Conduct of Financial Institutions Options Paper

For institutional clients that subscribe to the Quarterly Life and Health sector industry report, I am preparing a one page issues summary and table of comments on the options. Do contact me if you would like a copy. 

For advisers, I thoroughly recommend this is one of the must read documents. 

Insurer's compliance challenges and the effect on advisers

Those insurers that distribute primarily through advisers are being challenged to ensure that their products are suitable for their clients. While suitability is not intended to mean everything financial advice means, any requirement to assess suitability is going to affect advisers in one way, or another. One aspect of suitability is eligibility - and we're not just talking about a client being old enough to purchase the contract. While 'hard' rules such as age of entry requirements are enforced by insurers, 'soft' rules such as whether a client would be eligible to claim under certain circumstances (such as some income protection scenarios for self-employed clients) have usually been left with the adviser to work out with the client, with the occasional intrusion of the underwriter. Other issues, such as assessing whether an applicant can afford the product, or is vulnerable to pressure, and may therefore require additional help, add complexity.

If one outcome of conduct review work is that enhanced management of these issues is required, then insurers must decide whether the work can be carried out by advisers, or if they must make all the assessments themselves. Either way, advisers will feel the effects. Additional information may need to be collected. Further checks - calls perhaps from the insurer to the client - may be required. The requirement to consider suitability throughout the life of the contract could place the insurer in the position of flagging up the issue of suitability problems. The extent to which the adviser is involved in these tasks may vary - but like it or not, there will be an effect on the relationship. 



The problem that just is never quite bad enough

There's a thing about a problem being a pain in the neck, but not quite bad enough, that means sometimes people put up with stuff for ages, that really should have been fixed long ago. 

Take policy documents and renewal letters in the insurance industry.

With perhaps just one or two exceptions, they are pretty bad. Neither attractive, nor functional. They are complicated documents, that, in many ways hark back to an era before computing. The concept of taking a standard set of terms and conditions and stapling a specific schedule of personalised details to it would not be invented today. But it isn't catastrophically bad. Or wasn't. The recent review of conduct and culture may begin to elevate some systems issues up the priority list, and hopefully this will join them. 

The problem, if you like, of the problem, that isn't quite bad enough could be seen through another lens. Think of the myriad small jobs at home that you probably don't get around to tackling until your fierce Aunt Mabel is coming to visit. Then you  look at the little paint jobs, the dodgy, handle, the fiddly lock, the carport clear out, and the junk in the spare room with a different pair of eyes. Then you get on with them. 

Curiously, Seth Godin has also identified another type of problem - not one too small to get priority, but just so big and unsolvable that you live with it. It becomes 'just part of the weather'. That's fair enough - I like to say "it is what it is" when faced with problems like this. But the unfortunate thing is that the habit of accepting the problem becomes routine. You get used to it not being solvable. So when suddenly someone comes along and finds an answer... you are stunned. You may even criticise the people that fixed it for not 'playing by the rules' somehow. It is worth challenging yourself from time to time on just what the 'rules' really are, and what is merely culture, tradition, or habit. 

Read Seth Godin's excellent post in full here


FMA and RBNZ report on life insurance sector

While I will do a thorough review of the document and its implications for clients in due course, I thought it worth mentioning some of the questions people have asked about the report. They are not my view, but a good reflection of the, sometimes contradictory, views of people in the industry:

  • Well, that's better than expected
  • More products should have been listed as cause for concern (along with...)
  • Less products should have been listed as cause for concern (concern for product scope to be set)
  • So, are commissions to be banned? (based on the NZ Herald's take on the report, not the report content, obviously)
  • Will advisers have to go to eight different training course run by insurers on how to sell their products? (considering one vision of an attempt to direct on suitability)
  • If insurers are responsible for suitability doesn't that push them into the advice space? (a valid concern, detail is available in recent reports)
  • The FMA's big data trawl found very few advisers aggressively replacing business
  • I've chosen my last supper - my personal favourite, from an adviser who actually has very little to worry about

My feeling is that there is a lot to address, and that I think most insurers are not that surprised at much of the content. As a fairly high-level document, there are some significant questions. A lot of concerns were based on an absence of evidence of good management, rather then evidence of bad management or bad intent. But the concern, and the link to the Hayne report, is whether a culture of focus - in this case, on sales, perhaps - rather than good outcomes could dominate in decisions about value for customer.

Anyway, more details for clients, coming soon.

Australia: FINSIA signs up to landmark code monitoring agreement with professional associations

FINSIA Council member News Update announces a code monitoring agreement (see below). What interesting is the interaction between various standards and requirements. Legal standards, regulations, licence requirements, code standards, and contract terms all form a complex web of requirements for an advice business. Governance processes to monitor meeting all the requirements are central to the operation of the business. What can be safely outsourced, versus what must be managed within the business, will be a major issue for advice businesses whatever their size.


FINSIA signs up to landmark code monitoring agreement with professional associations 

The Financial Services Institute of Australasia has agreed to be part of a group of six professional financial planning and advice associations developing a code monitoring solution for members to deal with upcoming regulations.

The associations have agreed to work together to submit a code monitoring compliance scheme application to ASIC so the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics can be monitored and enforced.

Chris Whitehead, FINSIA CEO and MD, F FIN, said: “As the professional membership body for the financial services sector, FINSIA brings its expertise to the cooperating associations to help lift professional standards within the sector by the introduction of a defined code monitoring cooperation agreement.  

“FINSIA supports its members by ensuring the financial planning and advice sector is recognised as a profession by developing a scheme by the profession for the benefit of the community.” 

For a copy of the media release, ‘A landmark code monitoring cooperation agreement announced by professional associations’ please click here

FINSIA is committed to keeping its members up to date on initiatives like these that help raise standards of professionalism for the financial services sector.

What are conduct obligations as distinct from financial advice?

What are conduct obligations as distinct from advice obligations? MBIE’s review of insurance contract law includes insurer conduct in its scope and takes a longer view of the need to ensure good conduct in the insurance market.

Pondering where the review may head, I reviewed ASIC’s reports on direct sales processes. Those clearly identify practices that fell short of acceptable, and details what it sees as effective remedies. A good reference point is there report “Rep587: The sale of direct life insurance” and “Rep588: Consumers experiences with the sale of direct life insurance”. The conduct obligations envisaged by the reports include:

(a) Provide adequate explanations of key exclusions and future cost
(b) Stop pressure selling
(c) Introduce a deferred sales model for downgrades
(d) Stop using techniques that frame consumers’ choices
(e) Establish a clear target market for limited value products and only sell these products where there is genuine consumer need
(f) Strengthen protections for vulnerable consumers
(g) Ensure that automatic cover increases do not exceed what the consumer can claim

Those all look like obligations distinct from the provision of financial advice as defined in our law, and hence apply to product providers even if not providing advice. If you group them under main headings they can be further summarised as:

• Sales practices must protect vulnerable consumers – which is probably not just an insurance-related issue (items b, d, and f)
• Information asymmetry must be addressed throughout the sales process (items a, c, and e)
• Eligibility is the responsibility of the insurer – including both at policy commencement and during the life of the policy (item g)


FMA on explaining fees to customers

The FMA has this media release explaining the link, identified from their recent customer survey, between trust and how well fees are understood. The short version is that consumers trust you more if they feel the products are suitable and can understand what they are paying. This makes me laugh. As I am in the midst of the holiday season surrounded by people who are not in the financial services industry I don't have far to go to get a reality check. With most services, consumers don't even suspect that it should be hard to understand what they are paying...