Individual personalised risk advice and the best interests duty

Typically a risk insurance dispute will arise when the insurer decides to avoid the policy. Quite often it is on the basis of non-disclosure on the part of the policy holder because the wording of the policy limits what is not covered.

The next step is to examine the conduct of the financial adviser who made a recommendation to purchase the policy. This will usually mean determining whether the advice is inappropriate because the client was underinsured or if the policy failed to respond because of something the adviser did or did not do. Another common line of enquiry is whether the adviser placed the client into an informed position before the client accepted the recommendation.

One of the more common questions being asked by advisers and para-planners, particularly those who operate in the risk insurance space, is how much information should be contained in the SoA to satisfy the Best Interest Duty (BID) obligations? There is a balancing act for advisers to include enough information in an SoA so that the client understands the advice but refrain from including so much information that it is lost on the client.

Some advisers want to know if there is anything else they can rely on when providing advice for example, a science based argument? Does an adviser need to include extra information (as part of satisfying BID) in their advice documents about things such as:
• The average amount of time off work a person may require as a result of a trauma event; or
• How long a person will take to recover from a particular type of procedure. (See Note 1.)

Facts and figures

There is an argument that facts and figures around recovery times may help the adviser educate the client about the advice by presenting a situation to which the client can relate. One of the problems with this type of information is that it can be considered general in nature and is not client specific and should not be used as a substitute for individual personalised advice.

There are also other problems with relying too heavily on statistical information. For example one evidence based database contains a wealth of information on complications and treatments of certain conditions and a person’s prognosis following for example, acute coronary syndrome (heart attack). (See Note 2.)

The response provided by the database contained a series of algorithms that went on for 27 pages because of the possible complications and considerations of treatment and time to treat.  It is arguable that it would be difficult for the adviser to use this information in a meaningful way as part of educating the client about the advice.

What should advisers be doing?

As we adjust to the introduction of the BID obligations and the fact that appropriateness of advice is now a legislative requirement under the Corporations Act, advisers are becoming more concerned about the basis for their recommendations in their SoAs. This is the right path for advisers to tread as advisers do need to be concerned with ensuring that their advice is based on the client’s relevant circumstances and that it meets the needs and objectives of the client.

More concerning however is when an adviser or paraplanner makes a comment that they don’t really understand what is required of them and that they only want to include in an SoA what they are required to by law. Such an approach may result in template advice that fails to properly consider the client’s relevant circumstances, needs or objectives.

How do the courts approach disputes?

Recently in a case before the Court of Appeal, NSW (see Note 3) the Court found in favour of the respondent.

The respondent is the daughter of the Insured, the policy holder of a life insurance policy with Insurer B who died. Insurer B avoided the policy on the basis the Insured did not disclose his true medical history. The Court found that the AFS Licensee was liable for the negligent and misleading and deceptive conduct of its representative adviser who recommended the Insured cancel his policy with Insurer A and take out a policy with Insurer B.

In this case the Court found that the adviser was too hasty and failed to sufficiently impress upon the Insured the risk he took in replacing one policy for another. Essentially the Court found that the adviser did not properly explain to the Insured, the consequences of replacing his existing Insurer A life policy with an Insurer B life policy.

The SoA was prepared by a paraplanner (based on information collected by the adviser) and then returned to the adviser to make stylistic changes before presenting it to the client. During the trial the adviser was asked a series of questions about how his SoA was produced.

The adviser confirmed:
• A template was used and the adviser was effectively called upon to comply with a template rather than comply with his obligation to give individualised personal advice;
• That he considered relevant disclosures and explanations were the role of the AFS Licensee and its team; and
• He was hamstrung about the amendments he can make to an SoA before it is presented to a client.

The information contained in the SoA under the heading “Alternative Strategy” was also examined by the Court. One of the alternatives contained in the SoA was to “self insure”. The insured’s total assets amounted to $17,000 and the Court stated that the suggestion to consider self insurance as “absurd to regard as a serious alternative”. The Court formed the view that the only reason the adviser included

the suggestion that the client self insure was so that the file could be processed by paraplanning in accordance with the AFS Licensee’s requirements that an alternative be included in the SoA.

In summary

Although the Court found that there was no statutory obligation on the adviser or the AFS Licensee to act in the Insured’s best interests at the time the advice was provided (the advice was provided Pre-FoFA and prior to the statutory introduction of BID), it found that the AFS Licensee (through its adviser) had misrepresented to the Insured, the consequences of replacing one product with another.

Many advisers complain about the amount of time it takes to produce an SoA however, the lesson in this instance is that advisers and licensees must ensure that part of their process in producing an SoA provides for genuine customisation of the advice.