The life span of client consent for insurance advice clients remains unresolved and is becoming a source of consternation for advisers buying or selling insurance books.
With little clarity on how Standard 4 of the Code of Ethics should be applied to insurance, confusion reigns about whether clients that have been transferred from one adviser to another still have a consensual agreement in place.
“As with a lot of things, it’s the conflict between the code and the legislation that’s the challenge,” says Jeff Thurecht, director and adviser at Evalesco.
Thurecht is in the process of purchasing the Noall & Co advice book of Marc Bineham, the ex-president of the Association of Financial Advisers who is stepping away from being an authorised representative to offer money coaching services and promote his new book, The Money Sandwich.
Bineham’s business has about 25 holistic advice clients, for which Thurecht will need to get signed fee consent forms over the next twelve months as per fee consent legislation that came into effect on 1 July. There are also more than 400 insurance advice clients, yet these are exempt from the new fee consent regime, which ASIC deems a “non-ongoing fee arrangement”.
However, Standard 4 of the code, which prohibits advisers from acting for a client without the clients’ “free, prior and informed consent’, could be interpreted to preclude the transfer of consent between advisers – meaning Thurecht would need to get all 400 or so to re-sign consent for their policy to continue.
“It’s really unclear what the code means in this situation,” Thurecht says. “We haven’t really seen it being tested yet.”
Thurecht estimates that if had to ask 400 insurance advice clients to re-sign in the next 12 months, he would probably lose around 20 per cent of the book.
Making standalone insurance advice profitable and sustainable means the volume of clients is generally much higher than holistic advice, Thurecht explains, with less ongoing contact after the initial engagement.
“The normal process for insurance is different because while there’s an annual renewal and engagement around that, the client circumstances relevant to their cover don’t change as often,” he says. “Generally the client lets you know if their broader circumstances change.”
According to Bineham, the differences between holistic personal advice and insurance advice mean the application of Standard 4 should be delineated between the two areas.
“It’s hard to put one generic rule that covers the lot in the Code of Ethics,” he says. “But the same rule shouldn’t apply to both here. They’re not the same.”
Willingness to engage
The lack of clarity on consent for transferring insurance advice clients is an issue that the Association of Financial Advisers brought up in its submission to FASEA.
The authority released its Code of Ethics guide in October 2020, yet the section on Standard 4 didn’t address the issue.
Responding to the guidance in its submission, the AFA said uncertainty around Standard 4 has caused “greatest concern amongst risk advisers and financial advisers who have bought a financial advice business or register of clients in recent years”.
The AFA says the application of Standard 4 – if it’s assumed to infer new consent is required – would inhibit the transfer of insurance advice books between advisers.
“We believe that Standard 4 has the potential to have a detrimental impact on the advisers who have recently purchased a financial advice practice and for those who are currently looking to sell their businesses,” the submission states. “The impact will be greatest on risk practices, and will have flow on consequences to the entire life insurance market.”
When an adviser purchases a book of clients, the AFA argues, “the purchase effectively facilitates the assignment of existing arrangements between the adviser and the client to the new adviser.
“We recommend that in the case of the purchase of a business or a book of clients, the consent obtained by the former adviser is treated as applying to the new adviser,” the AFA states.
According to AFA acting CEO, Phil Anderson, no response was received from FASEA. “In our view there’s still a level of confusion about the requirements of Standard 4,” he says. “It’s still questionable whether a new adviser within a business or an external adviser in the case of a business sale gets ownership of the existing consent.”
The associations want clarity, but their default position is that consent does get transferred.
According to Bineham, most licensees agree. “If licensees definitely had to get consent on insurance you would have heard an almighty roar by now.”
Legal professionals that specialised in financial services regulation remain unconvinced, however. According to Mills Oakley partner Mark Bland the code focusses more on conduct than status, and acting for the client requires “positive steps” such as providing advice or contacting the insurer on the clients’ behalf.
“An adviser may not ‘act’ for the client until some time after buying the right to do so,” Bland says. “The Code clearly requires the adviser to obtain the client’s consent before acting for them.”