The Association of Financial Advisers (AFA) says the practice of “churning” in the risk sector can be addressed by greater transparency and the creation of an industry watch list to expose repeat offenders.
Following the Financial Services Council (FSC)’s Consultation Paper on Replacement Business Framework, industry discussions have recently put the spotlight on both unsavoury industry practices and sustainable insurance.
According to the AFA, the focus should be moved away from churning to correcting the chronic levels of underinsurance in Australia.
“The elephant in the room really is the fact that not enough people have life insurance, have the right kind of insurance and/or have enough insurance,” says AFA chief executive Richard Klipin.
“We congratulate the FSC for inviting industry discussion on current adviser practices and adviser remuneration and for paving the way towards a big-picture debate.”
Klipin believes that all parts of the advisory value chain – including product providers, insurers, licensees, advisers and professional associations – share a collective responsibility to deliver a growing and sustainable industry.
“The industry’s focus needs to be on supporting consumers to manage their risks,” he said.
On the issue of churning raised in the FSC Paper, Klipin says that while the practice exists, there is no evidence to support that it is widespread or systemic.
“Churning is rare and limited to a few isolated advisers,” he said. “While it’s important to stop the practice, action should be focused upon those advisers who churn, rather than the whole financial advice industry. It is also important that we clearly define what churn is and start to measure it.
“We believe that the introduction of the Best Interests Duty under the Future of Financial Advice (FoFA) legislation will highlight the importance of only moving clients from one policy to another where there is a net and material benefit to the client. But we also believe insurers have an important role to play in eradicating the practice of churn.”
The AFA’s suggestions for addressing churn include: life insurance application forms to include a declaration from the adviser that the replacement policy represents a net and material benefit for the client; insurers permitted to share information to establish who the churners are and create a ‘watch list’; and an updated financial-advice industry Code of Ethics to include an obligation on advisers to demonstrate and explain, in any advice document, the delivery to the client of a net and material benefit.
When the FPA started to bag individual advisers it was a sure sign that the FPA was under the control of product dealer group interests. Is the same thing happening at AFA? The AFA suggestion that advisers should sign a declaration on applications illustrates AFA also consider the compliance regime of FSRA to be redundant. If so why not campaign to repel FSRA and save clients and advisers a heap of money.