Advisers engaging in replacement business have been under intense scrutiny from regulators over the past several years, and the new financial advice regime will ensure that close attention is paid to the details when replacing a customer’s existing policy.
As part of the FSC’s ‘Get in Shape’ programme for advisers, Steven Burgess, of Compliance Refinery, says the FMA has determined replacement business as an area ridden with potential risk. He says advisers will have to be extremely thorough in explaining the benefits, and, most importantly, the potential negative impacts of replacing a policy, and it will no longer do to simply quote a cheaper price.
“Replacement business is an area the FMA has determined as an area of ‘highest risk,’ and rightly so,” Burgess said.
“That’s an area that advisers should be focusing on a lot more. It is much higher risk to potential customers, and it’s an area where you really need to be providing comprehensive advice to clients. You can’t limit the scope of that advice.”
“You need to make strong comparisons between what the old product was, and what the new product would be,” he explained.
“It’s really important that you get right down into the actual product details, so you can outline it and say “this is what you used to have, and these are the differences between that and what I’m recommending.” The more detailed the better, because these are the areas where the client can come back and tell you that they don’t have some sort of benefit or cover that they used to have, because they didn’t understand those differences.”
Burgess says that at the heart of it, advisers need to be extremely sophisticated in their understanding of various insurance products. He says risk is an area in which customers are usually the least knowledgeable, and it’s the adviser’s job to clearly lay out the risks specific to them.
“I’d say put in the product features and comparisons into your paper - it’s definitely not OK to just say that the product is cheaper, or that the client wanted to deal with you as their financial adviser, and to make it harder to find those tangible variables,” Burgess said.
“Highlighting benefits can also be really misleading. You might be getting a new feature or two, but you might also be losing some features. You have to point those out, and make sure the client really understands that.”
“Any loss of benefits is really important to disclose, as well as the specific adverse consequences of changing the product or cover,” he concluded.
“Make sure you put a lot of emphasis on what the actual benefits are, along with potential adverse consequences.”