Update on the FMA’s ongoing review of insurance replacement business and conflicted conduct

Aim: To describe the findings of the FMA’s review of insurance replacement business and conflicted conduct, and its expectations from advisers providing advice on replacing insurance policies.

Outcome: Completion of this module will enable financial advisers to understand:

  • What is a conflict of interest, and its drivers in the life insurance sector;
  • Consequences of conflicted advice on the replacement of insurance policies;
  • Why the FMA is concerned about the conflicted conduct of advisers offering advice on replacing insurance policies;
  • The FMA’s expectations of advisers providing advice on replacing insurance policies; and
  • The actions taken by the FMA against advisers found in breach of their conduct obligations.

Abstract: The FMA’s report on its ongoing review of insurance replacement business and conflicted conduct details its findings, the results of its inquiries to date and its expectations for advisers when they are providing advice on replacing insurance policies.

The report focuses on the conduct and practices of RFAs and AFAs selling personal insurance products. It finds that the risk of conflicted conduct in the life insurance sector is exacerbated by up-front commissions and incentives, which focus on sales targets rather than clients’ needs. In addition, many advisers they reviewed and interviewed, failed to recognise a conflict with the interests of their clients.

It also notes that insurance providers need to take responsibility for mitigating areas of poor and conflicted conduct, since it is the incentive and commission structures they have designed that create these conflicts. The proposed changes to be brought about by the Financial Services Legislation Amendment Bill are described.

The action taken by the FMA against advisers found in breach of their conduct obligation to exercise care, diligence and skill is described. While the FMA’s report is focused on insurance advisers, the FMA expects all financial service providers to manage conflicts appropriately so they can demonstrate they are considering customer needs and outcomes at all times.