FSC “churning” proposal a bitter pill for risk advisers

Most financial advisers are opposed to the Financial Services Council’s proposed Replacement Business Framework measures, with many concerned that the medicine may prove worse than the malady.

The reforms designed to stop the practice of insurance “churn”, as proposed by the FSC in a recent consultation paper, have divided the industry, with many experienced life-risk specialists warning they may result in unintended negative consequences for clients.

Churning is the practice of canceling a client’s existing insurance policy and replacing it with a new one in order to generate additional commission for the agent.

However, clients who are retiring, those who want to reduce or discontinue cover, or those who want to place business with another adviser create a grey area where lapsed and reinstated business has nothing to do with churning.

A Guardian Advice survey of its authorised representatives found 71 per cent of advisers did not agree with the FSC’s definition of replacement business; 88 per cent did not agree with five years being the right timeframe for replacement business; and 78 per cent did not agree with the proposed remuneration level on replacement business.

Based on those views, Guardian has submitted a response to the FSC’s consultation paper on its Replacement Business Framework.

“We believe that only a small proportion of advisers arbitrarily churn business,” says Guardian Advice head Simon Harris.

“However, we recognise this was an issue flagged by the government when developing the Future of Financial Advice (FoFA) reforms, and we applaud the FSC for taking a leadership stance to address churn.

“As a risk-focused licensee aligned to growth-oriented advice businesses, we wanted to give our advisers a voice on this important issue and an opportunity to shape the outcome of the proposed Replacement Business Framework.”

Recent research reveals …

The group’s survey results suggest that the FSC has some way to go to convincing advisers about its proposed replacement business focus.

Asteron Life recorded a similar result when putting forward the independent adviser view in its submission.

Executive manager of the life-risk specialist, Mark Vilo, says the company wanted to understand the real implications of the FSC’s framework on replacement business for advisers as a whole.

“We collected the valid concerns of a think tank of 70 advisers to fully represent their views in our submission,” he says.

“It’s important for the government to listen to the actual practitioners out there wearing their shoes out, providing advice to Australians on insurance.

“Churn is not something practiced by most advisers. But for those advisers that replace business where it is genuinely in the best interest of their clients, we need to ensure that their businesses are able to survive, particularly in the current economic environment where cash flow is an issue for most advice practices.

“Overall, the industry needs to take a collective approach to deal with replacement business, otherwise, structurally, this industry will be unsustainable.”

Proposals from the “big end of town”

Key reforms under the FSC’s proposed Replacement Business Framework include:

Mark Dunsford, director of Dunsford Financial Planning, told Professional Planner Online he is continually disturbed by the FSC, it’s chief executive John Brogden and their misrepresentation of the use of the word churning in the life insurance industry.

“This organisation is made up of life insurance executives only, without representation from the AFA, FPA or any financial advisers specialising in the risk field,” he says.

“Brogden continues to push the life-insurance-company line – that churning is a major issue. The average life insurance company experiences an average lapse rate between 9 per cent and 14 per cent, which has been the industry experience for the past 30 years.”

Dunsford believes the bigger issue is that the FSC is attempting to change the way life insurance advisers review their clients’ risk-insurance needs.

“John Brogden, through the FSC, has pushed the idea of no upfront commission for a life insurance policy that has been held for under five years, in addition to a two-year-responsibility period,” he says.

“Not only does this discourage advisers to review existing life insurance plans, but it means that life companies that become uncompetitive due to bad claims, lack of product upgrades, poor administration and underwriting fundamentals will maintain business they don’t deserve.

“Their whole modus operandi is around making life insurance products more profitable for the life-insurance company.

“This hinders our major industry issue, which is the major under-insurance that Australians have, which again puts massive strains on our already overburdened welfare system.

“How can you get a balanced approach to this discussion when it is so heavily weighted by the big end of town, who are only looking for higher profits from the products they manufacture?”