It has completed a review of the insurance practices of QFEs around replacement business and found there are particular conflicts of interest they need to manage, and it's not convinced they're doing it.

The regulator found fewer than half the firms advised customers that replacing their insurance could lead to worse cover or loss of benefits.

Replacement business forms were used as a risk management tool for insurers rather than to help customers with their decision-making.

None of the insurance providers had an independent process to distinguish between new and replacement business.

Liam Mason, FMA director of regulation, said it was disappointing that there were a couple of QFEs who, despite all the attention the regulator had put on insurance replacement business, did not seem to have paid any attention to its messages at all.

“It’s pretty disappointing that there are still some that don’t even have their advisers recognise replacement business as a particular transaction that poses a risk to customers.”

The review showed the FMA was right to put the focus on insurance practices, he said, which delivered $2 billion in premiums a year.

“The majority of insurance sold is replacement and there are real risks to consumers. This tells us we are right to keep the pressure in there.”

The FMA had previously had a focus on the advised distribution channel, he said. “It’s only right to also turn out attention to the big firms and ask is it any better here? We found some good practice but we also found some areas where it was not up to scratch.”

He said QFEs needed to recognise they had specific potential conflicts of interest that needed to be identified and managed. “That needs to be done thinking about the risks to consumers and how to improve the customer experience.”  

Those firms where problems had been identified would be given a chance to engage and then, if it’s determined they had breached their obligations, could be censured privately or publicly, given a direct order or fined.

He said, while FSLAB would introduce clearer standards for all advises and a more level playing field, all QFEs already had an obligation to put adequate consumer protections in place – and the review showed some had still not met those.

Among the findings

• One entity has no process in place when it comes to replacement business. They ask their staff not to facilitate or manage the replacement of life policies but there are no controls in place to ensure that this actually happens. Ultimately, no advice is provided and the customer carries full responsibility to determine whether the entity’s policy meets their needs.
• One entity has no oversight process in place and simply cautions their customer about potential risks without further elaborating on them.
• One entity has only one particular team that is allowed to process replacement business. These advisers are encouraged to prepare one sentence where they describe differences between policies; besides this they rely heavily on scripted generic talking points.
• One entity has no oversight process but instead relies on underwriters to identify replacement business. Since a customer decision has already been made at this point, we consider this, at best, an indicator of replacement after the fact. The entity also looks at adviser persistency ratios, which the FMA said it considered to occur in the entity’s interest rather than to protect customers.
• One entity does not provide personalised advice as part of their QFE distribution method but relies on class advice. As part of the “welcome” documentation, the customer is provided with a generic message, prompting them to compare their new policy with their old one in case of replacement. The comparison is reduced to two factors: the amount of cover and premium cost. This supposed warning message is not provided at any time earlier in the process when helping the customer in the decision making. The only oversight that the entity maintains is a quality assurance process that focuses purely on QFE adviser competency.
• One entity feels that since their QFE advisers sell products online or over the phone, there is no need for a replacement business form. It is unclear whether replacement is addressed as part of this distribution method. For their external financial adviser network, they use replacement business forms that appear to be purely geared towards calculating commission payments. The form still needs to be signed by the entity’s customers since they have to commit to cancelling their original policy once the new one has come into effect. There is no evidence of the entity cautioning the customer about potential adverse outcomes of replacing their policy.
• One entity only identifies and tracks internal replacement business. Therefore, replacement business between other insurers is neither captured nor identified. Without even a basic mechanism of identification, there is no way of providing their customers with good advice or mitigating the inherent risks of replacement business. The FMA said it was difficult to see in this example how the QFE was protecting the consumer from the harms of poor quality advice or a poor outcome from replacing their insurance policy.