Best Interests Duty also affects risk advisers

Regulatory changes over the past 18 months impact as much on risk advisers as they do on investment advisers, according to Jeffrey Scott, Executive Manager, InsuranceTech at CommInsure.

Speaking at the Synchron conference in Anaheim earlier this month, Mr Scott said, “We have seen recently that the Best Interests Duty will have an impact on risk advisers – and in a big way.”

Under the Safe Harbour provisions of the Best Interests Duty, advisers are required to investigate any existing life insurance products the client has, regardless of whether or not that product is on the adviser’s Approved Products List (APL).

“If a client walks into your office and they have an existing direct policy, retail policy, or have life insurance via an industry super fund, even though these products may not be on your APL, you now have an obligation to your client under the Best Interests Duty to investigate these products and compare them against products you are going to recommend,” he said.

Mr Scott said this represents a tremendous opportunity for risk advisers.

“I have analyzed direct life insurance products, retail life insurance products and life insurance policies inside industry funds,” he said. “Risk advisers have the ability to demonstrate they have acted in the best interests of the client by comparing: premiums, underwriting terms, conditions of release, exclusions, ancillary benefits, preclusions periods, ability to remove benefits and features, and cessation of benefits.”

Mr Scott said there are significant differences between the various policies and only via a thorough analysis can the client ensure that their life insurance policy represents value for money. “The most expensive policy is not always the best policy, nor is the cheapest policy always the best value for the client,” he said. “It is worthwhile for an adviser and their clients to compare the pair.”

Mr Scott also argued that the Best Interests Duty represents no substantial change to the way advisers have operated over the past 10 years.

“This is the Know Your Client Rule and the Know Your Product Rule from the 2004 Financial Service Reform Act; it has just been renamed Best Interests Duty. The responsibility for an adviser to provide excellent advice to client has not changed,” he said. “You now need an appropriate audit trail. Ensure that if something happened, someone could take your file and defend your actions and advice without you saying a word.”

Synchron director, John Prossor said Mr Scott’s presentation, which included actual examples of prosecuted risk cases, highlighted the need to keep an extensive audit trail.

“I know we keep saying it, but if someone is looking through your files, whether it be the regulator or lawyers, if you don’t have a good audit trail you are in trouble,” he said. “Clients may have a different recollection of events when there is a complaint and take their different recollections into court.”

Mr Prossor warned that, should a complaint go to court, it is likely to be a very challenging experience. “Unless you have a detailed audit trail demonstrating exactly what you did for your client and when, there is a strong chance that the court will find against the adviser and in favour of the client”.