Compare and Comply

24th IFA Professional Development Series – September 10-25Providing Professional Services with Integrity

RiskCompare, comply – with technical help!

10.45-12pm

Presented by: Alan Rafe

Thanks to the support of our Premier Business Partners:

The Role of Price and Product Comparison in the Sales Process required of Authorised and Registered Financial

Advisers


The FoundationRequirement to Act with Care, Diligence, and Skill in all Financial Advice Services•The Financial Advisers Act 2008 requires all financial advisers to act with care, diligence and skill in providing their services to clients. •The overarching purpose of the Financial Advisers Act 2008 is to “promote the sound and efficient delivery of financial adviser and broking services, and to encourage public confidence in the professionalism and integrity of financial advisers and brokers.”

Advisers must: •Act with reasonable care, diligence and skill.•Ensure they are not misleading, deceptive or confusing.

This session looks at: 1.The examples given and explores what they mean, and considers areas where practice standards which were once common may need to change.2.Functional requirements to meet each recommendation and mechanisms you can use to meet them .


FMA RequirementsThis introduction to what the FMA expects clearly identifies three requirements: 1.Assess suitability 2.Explain key features as well as limitations3.Explain limitations on the service

It is then explained that:•There must be records to show that this has been done, and in case there was any doubt, the requirement to disclose and manage conflicts of interest arising from commissions or their remuneration is reiterated.

•Additional requirements apply to Authorised Financial Advisers, which also serves to highlight that these requirements apply to Registered Financial Advisers.


Code of Professional ConductPrevious Code Standard 6, Explanatory paragraph stated: “When providing financial adviser services to a client, an AFA must: (d) make recommendations only in relation to financial products that have been analysed by the AFA to a level that provides a reasonable basis for any such recommendation, or analysed by another person upon whose analysis it is reasonable, in all of the circumstances, for the AFA to rely.

Current Code Standard 6, Explanatory paragraph states: “When providing financial adviser services to a client, an AFA must:” (c) “make recommendations only in relation to financial products that have been assessed or reviewed by the AFA to a level that provides the AFA with a reasonable basis for any such recommendation, or by another person if it is reasonable in all the circumstances for the AFA to rely upon that other person’s assessment or review.


Institute of Financial Advisers Codes, Standards and RulesThe Code of Ethics, Practice Standards and Rules of Conduct make up a package of requirements for good practice for IFA members.

Code of Ethics•There are no specific provisions in the Code of Ethics directly referencing research conduct in relation to products or solutions. Provisions of the Code of Ethics are only applicable in a generic way to research conduct, as captured by the principle headings in the document, Client Interest First etc


Practice StandardsThere are some statements in the Practice Standards that might be applied generically to research conduct relating to products but the key provisions appear to be 4.1, “Identify and Evaluate Financial Advice Strategies,” and 5.2, “Identify and Present Product(s) and Service(s) for Implementation.”

Under 4.1, the key explanatory phrase is, “The financial adviser evaluates the ability of each strategy to reasonably address the client’s objectives, needs and priorities.” Note that this relates to evaluating a strategy rather than a product.

Under 5.2, the key explanatory phrases are: “The financial adviser uses professional judgment in identifying the products and services that are in the client’s interest. Professional judgment incorporates both qualitative and quantitative information. Solutions identified by the financial adviser may differ from those of other professionals since more than one product or service may meet the client’s needs.”


Rules of ConductThere are a number of statements in the Rules of Conduct that might be applied generically to research conduct relating to products but the key provision appears to be:

Paragraph 43: “Consistent with the scope of the engagement, a financial adviser shall undertake a reasonable investigation of the products and services to be recommended to clients. A financial adviser may rely upon an investigation undertaken by a third party provided it is reasonable to place reliance on the quality of such investigation”


Financial Advisers Disciplinary Committee DecisionsRodney Ian Bourke-Shaw, Finding on 26 Sept 2013, Summary of facts •Breach of (the old) Code Standard 6, findings – (noting that the part of Code Standard 6 relating to analysis has now changed)•Paragraph 41 states: “This Code Standard (6) also embraces an AFA’s obligation to transparently manage conflicts of interest and to only make recommendations in relation to financial products that have been analysed by the AFA to a level that provides a reasonable basis for such a recommendation•Paragraph 42.3 states: “In FMA’s view, a reasonable AFA in Mr Bourke-Shaw’s position would have made further inquiries and would have continued to analyse RAM after the referral of clients and on an ongoing basis, to ensure that he or she was satisfied that it was appropriate for Oxford to recommend RAM Portfolios to clients.”


Financial Advisers Disciplinary Committee DecisionsStephen Musaphia, Finding on 16 August 2013, Summary of facts, and Adviser X, Finding on 30 May 2014, Summary of facts.

•Both of these cases reference breaches of Code Standard 12, in failing to keep adequate records, but neither directly references failure to keep research records, nor does either case specifically record a breach of Code Standard 6 in relation to failing to conduct adequate analysis.

Authorised Financial Advisers Monitoring Report

1 January – 30 June 2014• The FMA recommends all AFAs refer to their obligations under

Code Standard 8(a)-(c) and that they should be able to justify the rationale of their advice at all times. This means AFAs must be able to show their advice clearly meets the needs and goals of their clients. (pg

• Code Standard 9: Put benefits and risks in writing We expect AFAs to set out the principal benefits and risks to their clients where a Category 1 product is being recommended. Given the revisions to this Code Standard, these should always be set out in writing as opposed to just verbal conversations with the client. AFAs should tailor the risks and benefits to their client to ensure that the information is relevant. As good practice, AFAs should consider including information on the principle benefits and risks of following advice regarding Category 2 products too.


Fair Trading Act12A Unsubstantiated representations

• “(1)A person must not, in trade, make an unsubstantiated representation.

• “(2)A representation is unsubstantiated if the person making the representation does not, when the representation is made, have reasonable grounds for the representation, irrespective of whether the representation is false or misleading.

“If you say one product is better than another, you have to substantiate that,” David Ireland, of Kensington Swan, said. “Even if the product is actually better, if you weren’t able to substantiate it, you’d be in breach of your Fair Trading Act obligations. That’s the sting in the tail.”“Advisers could use rating agencies or research houses to help”, he said. (Goodreturns article, 18 August 2014)


Reasonable Assessed

Reviewed

Quality

Qualitative

Quantitative

Benefits

Risks


Product Replacement Advice

“When advising a client to replace an existing product with a new one, an adviser should consider whether s/he is giving (or the client might reasonably expect the adviser is giving) an opinion on the disposal of an existing product, as well as the purchase of a new product.


Product Replacement Advice contFor personalised advice, the adviser should:•Make an appropriate comparison of the client's existing arrangements with the new recommended product. This will require knowledge of the terms of the client's existing product. The comparison should be clear, reasonable and balanced. It should not just focus on the benefits of changing, for example, "the new product is cheaper". Highlighting only the benefits could be misleading.•Or, if no comparison is made, inform the client of the limited scope of the service. The adviser should explain that no comparison has been made, the types of adverse consequences which might occur as a result of changing products and that the specific consequences for the client have not been considered.•For AFAs, these points will assist with compliance with the Code requirements, including those relating to suitability and limitations on the service (Code standards 8 and 10)”.


Insurance Replacement“If recommending replacement of an insurance policy, the comparison should include:•the material differences in the policies relevant to the client, including any loss of benefits such as value or type of cover•the specific adverse consequences of changing policy or provider.

The adverse consequences might include:•a reduction in cover, for example due to a change in the date from which pre-existing medical conditions or property subsidence will be excluded•the amount of fees charged to cancel the policy•a specific period of reduced cover, for example 'redundancy cover will not be available for the first three months'.•If no comparison is made, the general types of adverse consequences above should be considered in explaining the limited scope of the service”.


Quotemonster Research Approach•Client Perspective•Pesonalised Research•Provides Quantitative and Qualitative•Fit For Purpose Approach•New Replacement Business Report•Independent (do not pay to play)

PersonalisedPricing

Accuro

AIA

AMP - Lifetrack

AMP - RPP

Asteron

Fidelity

nib

OnePath

Partners Life

Southern Cross

Sovereign

Product Research

AA LifeAccuroAIAAMP - LifetrackAMP - RPPAsteronFidelitynibOnePathPinnacle LifePartners LifeSouthern CrossSovereignASBBNZKiwibankWestpacUnimedMASCIGNAANZ

18 www.chatswood.co.nz

FMA RequirementsInsurance advice must be balanced - providing a clear explanation of both the benefits and the exclusions or limitations of the product's cover.

Examples of ProblemsYou cannot, therefore: •List only the advantages of a policy•Fail to disclose exclusions•Fail to disclose limitations Limitations may include: •The age-range of available cover•Limitations in individual benefits such as dollar limits •Features only included at an extra cost – but now included in your recommendation Other issues may include: •Failure to disclosure financial stability ratings•Applicability of features to specific groups – such as limitations on certain occupations Causes of problems:•Relying on marketing material or illustrations•Disclosing, but inconsistently, or selectively

Solutions

•Use standardised comparisons consistently.

•Use comparisons prepared by third parties who have no interest in the individual sale.

•Ensure your recommendations are based on the client’s specific circumstances.

•Keep copies of the comparisons on the client file.


Personalised AdviceFor personalised advice, consider the eligibility of the client for the product and the suitability of the product for that client.

Examples of ProblemsYou cannot, therefore: •Ignore client eligibility•Make recommendations without considering suitability on an individual client basis Suitability may include: •Whether the client needs this cover•How much cover the client needs•Whether certain features of the cover are required Other issues may include: •Whether you have collected enough information to assess suitability (fact find)•Suitability of features to this specific client Causes of problems:•Lack of a systematic process of recommendation leads to inconsistent recommendations

Solutions

•A robust fact-find and needs analysis.

•A standardised process for developing the client recommendation and calculating cover amounts.

•A review of features and benefits that is tailored to each client.


Advice in Conjunction with Another ProductIf providing insurance advice in conjunction with another product, advisers providing personalised advice should establish whether the client needs the insurance.

Examples of ProblemsYou cannot, therefore: •Assume a requirement for cover based on a related product sale•Make a recommendation without testing the requirement for cover Personalised advice means: •Looking at a client’s situation more broadly than for one product

Other issues may include: •Keeping up to date with a client’s situation because it may have changed Causes of problems:•Assuming no change•Assuming a need

Solutions

•Fact finds must include information necessary for all the products being recommended.

•A new fact-find and recommendation may be required if it was too narrow or too long ago.


Making ComparisonsMake an appropriate comparison of the client's existing arrangements with the new recommended product.

Examples of ProblemsYou cannot, therefore: •Ignore the client’s existing cover•Recommend replacement without advising on the disposal of existing cover•Focus on only one reason for change, such as "the new product is cheaper"Knowledge of the existing product means: •Being able to identify the strengths and weaknesses of the cover Other issues may include: •Addressing non-contractual issue of change – such as disclosure through underwriting the replacement contract Causes of problems:•Assuming no change in health status

Solutions

•Use a comparison of the existing cover with new cover in a standardised framework which prevents inconsistency between recommendations.

•Ensure that your comparison reflects the actual options or features applicable to the client.

•Conduct a new needs analysis when advising on replacement.


No ComparisonIf no comparison is made, inform the client of the limited scope of the service.

Examples of Problems

You cannot, therefore: •Provide no comparison without limiting the scope of your service

Causes of problems: •If your service normally involves an assessment of needs, then the client may assume that such an assessment has been done.

Solutions

•Always doing an assessment of needs looks more robust than selectively changing your advice process.


The Comparison Should Include….comparison should include: the material differences in the policies relevant to the client, including any loss of benefits such as value or type of cover the specific adverse consequences of changing policy or provider.

Examples of Problems

You cannot, therefore: •Ignore any material difference•Ignore negative consequences Material means issues that:•Could affect whether a claim is paid•Could affect the amount of claim Other issues may include: •Considering the provider, not just the policy Causes of problems:•In sales the focus is on only the issues critical to the client, and the decision to change. This requirement asks you to consider every material difference

Solutions

•Prepare a comprehensive comparison in all cases.