The FMA have released a report on their findings, following monitoring visits to around 60 FAPs.  These are my observations of some of their findings as they relate to advice issues for life insurance advisers.  Advisers and FAPs are strongly encouraged to read the full report to understand all the issues raised.

In general terms the FMA seems to be reasonably happy with what they have found. They have given many clues to conduct they would like to see and indicated some ‘gaps’ where FAPs can and must do better.

The root cause of some of these ‘gaps’ according to the FMA is “…complacency, where the FAP has taken a ‘tick-box’ approach to compliance instead of making an effort to fully understand the purpose of the new obligations.” 

It’s probably fair to expect that if the next round of monitoring visits doesn’t show improvement in the areas identified as needing work, the FMA’s response will be tougher.

FAP obligations to monitor the advice given by their advisers

According to the FMA, many FAPs did not have appropriate oversight of the quality of advice being given. Proper oversight of the quality of advice is critical to ensuring FAPs and their advisers comply with their obligations.

FAPs cannot simply rely on their advisers getting on with their professional development on their own. The FMA wants to see FAPs have an oversight framework that tests the quality of advice given - a framework that tests the substantive advice given, not merely one focused on record keeping.

In my view this is not a simple matter for life insurance advice. Giving acceptable life insurance advice requires a great deal of knowledge about many issues, it’s not just product knowledge (although that too is critical).

Testing the quality of advice requires some form of oversight by persons who are suitably skilled in all matters necessary for giving quality advice and who know life insurance products in detail (and there are lots of them to know).

Astute FAPs will recognise that every adviser has knowledge gaps that need closing. The difficulty is that many knowledge gaps remain unidentified simply because we don’t know what we don’t know. What is required is a programme designed to identify gaps and a plan to eliminate them, which brings us to Code Standard 9 – CPD. 

FAP obligations in relation to code standard 9 - CPD

The FMA want to see “advisers plan and complete learning activities to maintain their competence, knowledge, and skill.”  Every adviser must have a CPD plan. The FMA found many that did not.  Others had CPD plans that were not updated or suitable, in particular, the FMA found:

• CPD plans that were insufficient or relied solely on product provider webinars;
• CPD plans that gave no consideration to keeping up to date with the regulatory framework;
• No analysis of knowledge gaps;
• Some plans only recorded prior learning.

The FMA wants to see a “considered approach to CPD”, by identifying knowledge gaps, covering all aspects of the financial advice offering, and planning for suitable training or other learning. This must be planned for at least annually and the identified learning achieved and recorded.

Suitability of advice

While some advisers did demonstrate how the advice they gave was suitable for their clients, the FMA noted some disappointment and mention the following unsatisfactory examples:

• insufficient needs analysis or product research and no consideration of proposed policy terms;
• instances where multiple products had been considered but without comparison or justification to support the recommendation;
• recommendations which were not in line with the client’s needs or goals, or the advice process did not consider the suitability of advice at all;
• recommendations on replacing existing products without suitable comparison of benefits lost/gained;
• assumptions were made about affordability due to a client’s age;
• recommendations of cover greater than a client’s need simply because they could afford it.

Interestingly, the FMA suggests that advisers also need to consider “… how suitability is maintained if they provide ongoing advice. Advisers should consider a client’s current and possible future needs and circumstances to ensure the advice remains suitable throughout the lifecycle of a product.” 

This tells me advisers typically cannot simply consider the client’s current needs, they must also consider the client’s future needs, as they progress through to and in, retirement.

Consideration must be given, today, to the flexibility and ability of their recommendation to deal with changed needs tomorrow, which may be many decades away. Some provider’s products do better than others when it comes to the flexibility to change insurance as clients age.

These points highlight how the FMA expects advisers and FAPs to do better at identifying knowledge gaps, improving their knowledge, giving suitable advice and ensuring advice given accords with the agreed (and clearly understood) scope of service.

All of this raises questions in my mind about consequences and potential FAP director liability if these issues aren’t properly addressed, something I might explore next time.