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...

AIA Sovereign drop incentive travel as well

AIA Sovereign has dropped incentive travel trips too, joining Partners Life, in their recent announcement, and AMP, who announced it earlier. Although I feel an honourable mention should be madee of OnePath who have not offered trips for some years.

AIA New Zealand / Sovereign to cease overseas recognition trips

Auckland − 22 November 2018

AIA New Zealand / Sovereign, New Zealand’s largest life insurer, will cease overseas recognition trips for advisers beyond 2019. The decision forms part of a wider review AIA / Sovereign is proactively undertaking to support good customer outcomes.

Commenting on the decision, AIA New Zealand / Sovereign CEO, Nick Stanhope says: “Our aim is to ensure our relationship and responsibilities with advisers remain closely aligned to supporting best practice and promoting good outcomes for customers.

“As the largest life insurer in New Zealand we take the responsibility of earning and maintaining the trust and confidence of our customers very seriously.

“We are actively engaged in the current regulatory reform process and support the work of the FMA and the Reserve Bank to improve transparency and to ensure that customers continue to have every confidence in New Zealand’s life insurance sector,” said Mr Stanhope. 

“We have briefed our staff and advisers on the decision. The reaction has been very encouraging,” he added.

AIA New Zealand / Sovereign will be in a position to apply its new policy on overseas recognition trips from late-2019. Next year it has an existing contractual obligation to complete one last overseas recognition trip.

AIA, as one of the world’s largest life insurance companies, believes that there is significant benefit in giving its advisers the opportunity to learn from AIA Group best practice. Any additional adviser travel from 2019 onwards will be limited to education and training programmes that support our partners in continuing to deliver best in class services for the benefit of their customers.

The evolution of trust

If trust is the new currency, and my only quibble with that statement is the word 'new', then exploring what trust is, how it works, and why it is so valuable is something worth doing. People do work on this stuff, some of them model it so you can get to grips with the basics experimentally.

Below is a link to an interactive site which allows you to explore what cheating does to a situations in which trust is required - and how variations in behaviour, even the role of simple mistakes, can have an effect on the behaviour present in the whole system. It does take time, about half an hour. I enjoyed working through the site with Matthew, my youngest child, who is twelve, who found it and brought it to my attention. Making predictions and testing them was fun and fast-paced. It helped us to have a conversation about trust, and how we respond when people let us down - and how others perceive us when we let them down. It shows the value of forgiveness in economic systems to allow trust to recover - and demonstrates that is a profitable approach. All in all, it was a valuable contribution to thinking about some of the challenges we have in developing market structures that support good conduct.

Click here to play an interactive game of trust by Nick Case.

Geoff Annals on conduct obligations

Geoff Annals, CEO of Accuro, the health insurer, has made the clearest statement yet by any insurer on a shared view of responsibility for client outcomes.Illustrated in this quote, by talking about servicing requirements:

“Our remuneration should reflect that. That’s one of the things insurers can be criticised for. If we remunerate without requiring evidence that the service we expect has been delivered, we should be in the gun, too."

or a goodreturns article, at this link.

Previously companies have tended to act in a way which suggested a very clear demarcation between the insurer and the adviser. That view was a split between the client experience between product and service performance (provided by the insurer) and advice (provided by the adviser).

The view is effectively a recognition of the various legal contracts that underpin the commercial arrangements. Clients have a contract with the insurer, the insurer is not involved in the arrangement that the client may or may not have with the adviser. The adviser's role with the insurer is defined in their agency agreement. This split is widely reflected in the split in law, but it is not as clear-cut as it is sometimes represented. Whether insurers like it or not, advisers are their agent when it comes to the point of application. In other respects the boundaries may be blurred as well, such as when an adviser makes a mistake in good faith, and the insurer handles resolution - cancelling contracts from inception and returning monies paid, for example.

The discussion about conduct is drawing some areas previously dealt with by assumptions and expectations into the daylight, and is perhaps demanding that they should be made explicit. Perhaps there should be explicit service obligations. If a significant portion of the client's experience of a product is based on a service the adviser will provide, then maybe the adviser and the insurer should agree what that service looks like.

The potential upside for advisers here is clarity in their centrality of their role to the operation of the product. On the flip side of that, insurers may wish to operate two channels - one where they are happy with transactional introductions, and another where they want a genuine partnership with advisers.

It’s not just banks; insurers and advice businesses need to read the latest FMA report on banking conduct

No media report I have yet seen appears to have identified that the issues and FMA requirements outlined in the report will be relevant to all financial services providers, not just the banks. That includes companies contemplating Financial Advice Provider licences, and those intending to distribute insurance on a no-advice basis too.

If you are in financial services, read the banking report, and measure your financial services business against the findings and clear requirements that the FMA and RBNZ are headlining. You might also assume that these requirements will form part of the licensing requirements for financial advice providers.

Take particular note of the following:

  • Sales incentives – clear message that either these have to be removed or bank managers are going to be required to explain how they will strengthen their control systems to sufficiently address the risks of poor conduct that arise with such incentives.
  • Contemplate the implications for other sales incentives and commission payments throughout the wider financial services industry. Note also a further report focused solely on bank sales incentives is going to be released on 15 November. I am expecting it will be similarly tough
  • Compliance assurance – if you have not already done so, measure your business against the FMA 2017 Conduct Guide
  • Need to be measuring and reporting on “lead” as well as “lag” indicators to identify and mitigate emerging risks early, rather than simply identifying things that have already gone wrong.

Quotes – emphasis added by me:

  • “Banks cannot rely on the absence of identified issues as an indicator of good conduct.”
  • “Boards must be proactive in considering what information they require to obtain assurance of good customer outcomes.”
  • “The lack of conduct requirements in the delivery of banking products (particularly those distributed without financial advice) has hampered the FMA’s regulatory oversight and the development of consistently strong governance and management of conduct risk across the industry.”
  • “More work is required to ensure banks are comfortable with the quality of conversations and advice that occur via intermediary channels, and that the incentives offered to intermediaries are aligned with good customer outcomes.”

Slater and Gordon launches class action against NAB, MLC for "worthless" credit card insurance

Australian law firm Slater and Gordan have taken aim at bank NAB on behalf of clients who were allegedly sold worthless credit card insurance. Click here to read more. The concept of worthless insurance is one worth watching - it is not far from a class action like this one to determining value on the basis of claims ratios. That may well be useful in some circumstances - but could be excessively reductive in others. Insuring something rare on a one-off basis often requires charging a premium so high that the loss ratio is arguably very low - and yet it could be very valuable to have such cover. One-off event cover can fall into this category, as can insurance of professional athletes and models. In those cases the buyers of cover can usually afford to get good advice, of course. Gap insurance, on the other hand, in an example from the Australian Royal Commission, is a poor value product routinely sold to car buyers alongside lending. If the claims ratio were known more widely, it probably would not be sold in anything like the volumes that it is. I will watch the progress of this action with interest.

Australia: AFR Royal Commission Coverage

The AFR has this from the Australian Royal Commission. The recent coverage has tended to focus on general insurers and direct sales, although several complaints relating to living insurance were also identified. This included payments for breast cancer being made not on unequivocal diagnosis, but only after a mastectomy. Questions were asked about the level of commissions for life insurance as well.