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Lessons from Overseas

It is good to know that most local authorities follow developments overseas very carefully while transforming the industry, and consult widely.

Three recent reports from Australia are of importance to the local industry.

Clawback of Commission

The proposed introduction of three-year “clawbacks”, in the life risk space, is a hotly debated topic in the land down under at the moment. Apart from being grossly unfair to an adviser in cases where, for example, a client loses his job a year after the policy is issued, a new unintended consequence arises.

Risk Adviser, an Australian online newsletter, reports:

Introducing a clawback period of three years will leave many risk practice owners uncertain about the value of their business.

Speaking to Risk Adviser, Connect Financial Service Brokers chief executive Paul Tynan said the proposed three-year responsibility period will mean a lack of transparency about the value of a risk practice and lead to difficulties when selling it.

“[An adviser] could legitimately sell a policy to a client and for any number of reasons the client doesn’t renew their policy – that means there is going to be clawback,” Mr Tynan said.

Since there will be no guaranteed income for that period of time, no one will be able to properly estimate what the business is worth, he said.

Therefore, the way in which risk practices are bought and sold will inevitably have to change.

The days of paying a lump sum for the value of a risk business will end and with clawbacks of three years, transactions will more likely have to be completed in instalments.

Threat to small businesses

In another article in Risk Adviser, the Association of Financial Advisers’ chief executive, Brad Fox, said “… the association has been discussing the main concerns that advisers have with the Life Insurance Framework … with federal Liberal MP Bert van Manen, and it will soon take these concerns to Assistant Treasurer and Minister for Small Business Kelly O’Dwyer.”

“It is important that government appreciates that shifting of responsibility from the institution to the adviser threatens the future of advisers that own or are employed in small business advice practices,” Mr Fox said.

“It also risks worsening the $1.6 billion annual cost to government caused by underinsurance if there are fewer advisers.”

While the RDR proposals clearly indicate greater responsibility for product providers, the old adage will still apply – he who pays the piper calls the tune, even if it is with policyholder money. The threat of cancelling contracts where production is not up to the required level is likely to remain with us in the foreseeable future.

PI Cover

The cost of professional indemnity cover rose sharply in the UK after claims escalated, following stringent compliance requirements. IFA, another online Australian publication, reports:

Last week, international insurer Axis – a well-known provider of PI cover for financial advisers in Australia – said it would cease to quote new and renewal business as of 8 October 2015. A statement issued by the insurer said it will still provide cover for financial advisers in the Australian market through overseas offices.

In August last year, Suncorp’s Vero brand stopped servicing financial advisers… In 2008, Dual exited, but AIG remains and Chubb Insurance Company of Australia and XL Caitlin have also taken a punt and offer PI.

Suncorp’s reason for exiting the market reads: “A recent product review has determined that the financial planners segment of the professional indemnity market is no longer within our risk appetite.”

In South Africa, PI cover is not only a legal requirement – it is a sensible option for any financial adviser, given the huge potential for claims arising because of the raft of applicable legislation. Having to cough up more for PI Cover will just add to the already heavy burden of compliance on the industry.

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