Kell comments reignite churn debate

The Australian Securities and Investment’s Commission (ASIC) has given its clearest indication yet that reform is coming to the life insurance industry and that it is happy to police this sector. However, some risk advisers are far from happy, accusing the regulator of double standards. In a speech earlier this week, ASIC commissioner Peter Kell said he supported industry initiatives to deal with churning, the excessive switching of life insurance policies by financial advisers and brokers.

The Financial Services Council (FSC)’s attempt to self-regulate appears to have stalled after its decision to abandon an application to the Australian Competition and Consumer Commission (ACCC). In February FSC chief executive John Brogden announced his organisation had abandoned its application to the ACCC to obtain class order relief from sections of the Trade Practice Act.

This was a necessary step for the FSC to implement its proposed framework including anti-churn measures.

“If you don’t think financial advice on life insurance is a problem area for ASIC and for industry, please think again,” said Kell. “A number of our major surveillances resulting in licensing conditions, enforceable undertakings and, most seriously, licence revocations, involved evidence of significant amounts of inappropriate advice on life insurance.”

The life insurance stall

Kell said the regulator had identified four types of problematic advice on insurance policies, including two that raise red flags for churning: replacing a client’s life policy regularly with little or no demonstration of why the new policies are an improvement on the old, and replacing client life policies with more expensive life policies with little or no additional coverage.

“Why does this behaviour occur?” asked Kell. “Commission-based incentives in remuneration combined with inadequate compliance do not align the interests of the adviser with the client.”

While ASIC chairman Greg Medcraft has publicly stated its support for the industry to take a lead on addressing collective market problems, where possible, through self-regulatory or co-regulatory frameworks, Kell acknowledged that more work was needed.

A common industry position

“It has been disappointing, then, to see these developments stall in the life insurance area,” he said. “It’s a demonstration of the difficulties in achieving a common industry position, even if it should ultimately benefit consumers.

“People have observed that such a framework would, from a legal perspective, be anti-competitive. Yes, that’s the point! There are problems or market failures in any industry that can only be addressed by collective responses. Australia’s competition law allows for the formal approval of such arrangements if they are in the public interest, and there are many examples right across the economy. In financial services it’s why we have successful examples of cross-industry arrangements, such as the banking code, general insurance code, e-payments code, etcetera.”

Kell added that it was implicit from the beginning that the decision to carve out life insurance from the FoFA-conflicted remuneration provisions envisaged a self-regulatory initiative to address the issue of churning and clawback.

“Let me be clear – ASIC is not the owner, designer or driver of any such initiative. But, given our experience, we would welcome an effective self-regulatory framework,” he said.

“In the absence of an industry-led initiative, and given our experience with poor advice on life insurance, ASIC considers life insurance sales to be a risk area for non-compliance where high levels of switching are apparent. In particular we have a concern to ensure that life insurance switching is compliant with the best interests duty in the FoFA era. Life insurance switching will therefore be an area of focus for us, especially if potentially poor practices are not addressed through self-regulatory mechanisms.”

Lack of evidence

However, Synchron director Don Trapnell believes it is impossible to take self-regulation further without accurate figures from life companies on replacement business. “We are obviously very concerned that ASIC believes churning is a problem and also a little bit baffled,” he said. “One of the reasons Synchron was so opposed to the introduction of a Financial Services Council churning policy was that we believed there was no evidence to support that a culture of systemic churning exists among advisers.”

In an industry driven by statistics, compiling evidence of churning should be a relatively simple task, Trapnell said, and yet to his knowledge no life company has yet run the numbers.

“There is a question on every life insurance application that asks ‘Does this application replace an existing policy? If so, how long has that policy been in place?’ It would be easy to conduct analysis of this question and present this as evidence to decide whether or not we actually have a problem, but to date, to the best of our knowledge, no one is tracking this question.”

Trapnell said that despite Synchron consistently calling for the statistical evidence, the FSC and the life insurance industry did not provide it.

“In September last year I attended an industry forum at which FSC chief executive John Brogden apologised to advisers for calling them churners and acknowledged there was no evidence to support that a culture of churning exists,” he said. “If the FSC or the industry has since provided the evidence to ASIC, advisers need to see it.”