FMA report on replacement business processes at QFEs - UPDATED

The FMA has just released their report on QFE insurance providers’ replacement business practices. More detailed comments are available to subscribers to my Quarterly Industry Life and Health Review service. Summary comments on the report:

This review is important. This is part of the FMA’s series of reviews looking at replacement business advice in different distribution channels and forms of regulatory supervision. It is comprehensive and does a good job of exploring the conflict of interest issues present in vertically integrated organisations.

Consumer harm is explained but not quantified. The nature of the harm that can be caused by inappropriate replacement is explained, both in summary and in detail later in the document. What is not tackled is the extent of actual harm done. I agree that harm is done, but explaining how much and the impact on customers would help a lot in determining priority, and how to fix it. This is an issue which cuts across all these reviews.

Problems defining replacement business. The FMA mentions that every QFE has a different definition of replacement business, and one even defined it so narrowly that it only counted replacement of their own policies as replacement at all. It doesn’t appear to want to enter into the comment, let alone guidance, about the definition, however.

The FMA makes a number of hard-edged comments highlighting that it thinks there is insufficient acknowledgement of the conduct risks with replacement business, or the conflicts of interest inherent in the sales or advice process used by these QFEs. It goes on to state that action is being contemplated – although due to the problem of whether advice was given, this may be very limited.

Does this cover all replacement sales, or only replacements where advice was given within the definition in the FAA? Many QFE advisers claim exemption from requirements of the AFA code on the basis that they are not offering advice. Take particular note of the FMA’s declaration of its jurisdiction on page three of the report:

"QFEs are responsible for any advice given by their advisers. They must also ensure their advisers comply with their financial adviser obligations. One of an adviser’s obligations, under section 33 of the FA Act, is the obligation to exercise care, diligence and skill when providing a financial adviser service. We have issued guidance on the care, diligence and skill obligation, including in the context of insurance replacement advice."

That appears to exclude non-advised replacements. Many insurers have stepped outside the regime, and decline to offer advice. Many “QFE advisers” are not giving advice and never do so. This is an important point, but as a taxpayer I am leaning in the direction of not bothering to test it - after all, in a few months, the rules change. So maybe the FMA is focused on using the lessons of this review to keep the conversation about conduct going today, and inform its guidance under the new regime. That is probably wise.