Will the introduction of 'Client Best Interest' legislation have a significant impact on reducing churning?
- No (74%)
- Yes (16%)
- Not sure (9%)
Recent industry speculation suggests the practice of churning life insurance policies is set to become a thing of the past. But what is the opinion of advisers on this issue?
Our latest riskinfo poll asks:
Will the introduction of ’Client Best Interest’ legislation have a significant impact on reducing churning?
‘Client Best Interest’ legislation will be part of the soon-to-be announced FoFA reforms, which will enshrine into law the requirement that the financial adviser act in the best interests of their client. (This part of FoFA was previously described as the ‘Fiduciary Duty’ reform proposal.)
The argument is that if the adviser will be required by statute to act in the best interests of their client, they will be breaking the law, post FoFA, if they ever churn a life contract (churning being the practice of moving life policies between insurers for the purpose of obtaining higher levels of remuneration without a sufficient reason to cancel the existing policy).
While the logic of this argument is sound, there already exists a contention that current Financial Services Reform provisions make churning extremely difficult to achieve due to the requirement that all product recommendations and reasons be included within Statements of Advice.
Yet it is widely acknowledged that churning still takes place in significant numbers, meaning current regulations have not had the desired effect on stamping out this practice.
If this is the case, will the introduction of ‘Client Best Interest’ rules under FoFA make that much of an impact on the minority of advisers who are tempted to practice churning?
We acknowledge that it is difficult to determine the exact level of churning that currently takes place, as there are differing views as to what actually constitutes churnig, combined with the fact that there are usually very sound reasons why advisers update their clients’ life policies, such as product enhancements and innovations or changed client circumstances that make different policies more appropriate.
What is your view? In a post FoFA advice environment, will the practice of churning continue? Who is responsible - the adviser, the dealer, the insurer or the regulator? Let us know what you think…
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9 Comments
There is no doubt that churning goes on and it is regrettable practice but I am always amazed that the adviser is always in the sights of those firing the bullets including this publication
Sometimes with better contracts variable underwriting decisions and market competitiveness that there are legitimate reasons for change .
Would it be better that clients be locked in to a company long term even though through market forces a better or less expensive product might evolve
You only need to look at the graveyard of insurance companies swallowed up by competitors in the past 20 years to see some clients who are still on inferior contracts
Is it in the clients best interest to be forced to stay with a insurance company long term without a tender process to create a market force where contracts and pricing is evolving ? Do we just let the insurance companies with the clients locked away live off an increasing bottom line at the consumers expense ? I can hear the echo’s of the Woolworths /Coles duopoly ringing in the background
The Regulator - responsible? Surely a contradiction. Whilst insurers continue to improve definitions and play sales games in the guise of actuarial calculations on new discoveries for age groups etc the emphasis will remain on the advisers to ensure their clients do have access to the widest and most beneficial cover or, as is always the case, the adviser pays. If that is churning then yes it will continue and the blame will naturally & quite unreasonably be applied to the good old adviser.
The insurer is responsible for the whole matter of churning. Whilst life coys continue to upgrade benefits, pricing & underwriting etc “clients best interests” will mean an adviser MUST review their clients risk needs, more so in light of proposed FoFA changes.
Why not simply offer increased benefits yearly (at least) from day one by way of significant no-claim bonuses, this would go a long way to stop the practice if indeed life coys wanted to!
The other aspect that is not suffciently addressed by the legislation is the transfer of renewal commission from one adviser to another. I can understand this where the adviser has provided no ongoing contact however we see every week clients tranferring to other advisers who have not provided any work for the clients in establishing the policy. Especially when the adviser has sold his register and the “returns to the industry” after satisfying a qualifying period in the contract. It’s not like we haven’t serviced the clients.
What is churning? Replacing an expensive inferior contract with a less expensive modern contract?
Advisers, Clients and Regulators are not concerned about churning - Insurers are. “Churning” will only cease when, and if, all commissions are paid on a level basis.
Why it is accepted practice to recommend that a client switches their investment options as needed via research yet when research also says that same client should switch insurers (which is more challenging due to underwriting) it can be frowned upon as your article implies? Most insurers already know which advisers move substantial books of business (sometimes on a yearly basis) so I think the answer to reducing churning lies very much with the insurers choosing not to accept applications (I can already see most shaking their heads in disagreement) from the small number of advisers identified as operating in that manner. That in turn would then help the majority of advisers to continue doing what is best for their clients without being labled as churners.
How do you define churning because you are certainly allowed to write new business? If you put the best interests of the client first and have a reasonable basis for making the recommendation, then any suggestion of churning can be negated. If, however, you do not have a reasonable basis and cannot demonstrate a duty of care to the client, then you may have some difficult questions to answer from your compliance manager at the next audit.
Did Shorten just shorten his career in politics?
Well he did not lengthen it…!