Policy Replacement Proposals under RDR

The discussion document provides for measures to curb miss-selling and unfair outcomes for clients when existing policies are replaced by new ones. This applies to both long- and short-term business.

Provision for this is already contained in the current legislation which requires that the client must be provided with all the relevant facts required to make an informed decision.

Life risk policies

Product supplier commission will be prohibited on replacement life risk policies, to address conflicts of interest and miss-selling risks. An appropriate definition confirming what type of transaction constitutes a “replacement” for these purposes will be developed, together with specific advice and disclosure standards in relation to replacements

Please bear in mind that you will now be able to negotiate an advice fee with the client, in place of the commission you would have earned. This has another positive side to it: while the claw back on commission will very likely be retained, it will not apply to the advice fee.

I do foresee problems with this proposal, though, if it is not expanded on. The whole purpose of the exercise is to discourage unscrupulous advisers from manipulating the situation for commission purposes. They will now simply earn an “advice” fee, instead of commission, so nothing will prevent them from continuing on their merry way.

The current Replacement Policy Advice Record (RPAR) is possibly the only route to follow in order to ensure justified replacements that benefit clients, but needs to be applied a lot more rigidly.

The decision to prohibit product houses from paying sign-on bonuses was a major first step in the right direction. By also actively engaging providers to oversee that replacements are done in accordance with what is best for the client, rather than the adviser or product house, the FSB can actually delegate its responsibility to the provider.

There is absolutely no doubt that replacements are often necessary. Product enhancements and the effect of longevity on mortality rates are but two of a number of reasons why changes and new products will be better for the client.

Other long-term insurance products

Variable premium increases (i.e. voluntary ad hoc increases to recurring premiums) on legacy contractual savings products entered into before March 2009, when new commission regulations came into effect, still attract full up-front commission in line with the regulations that applied at the time the policy was entered into. This introduces a potential conflict of interest, as an intermediary may be biased towards advising a client to increase premiums on a legacy product rather than investing in a newer type of product, without fully considering the advantages and disadvantages of the legacy product – including the fact that such legacy products typically incur higher early termination penalties then newer generation products. The relevant commission regulations will be amended to address this anomaly. Accordingly, commission regulations will be changed to consistently apply the same commission basis to variable premium increases on legacy products as is applied to new generation contractual savings policies.

Short-Term Products

New conditions will be imposed for short-term insurance cover cancellations by intermediaries and insurers, to improve policyholder protection.

The as-and-when short-term insurance commission model does not expose customers to the same degree of risk of inappropriate replacement advice as the up-front commission for life risk insurance does. However, there are elements of the current short-term model that are cause for concern.

Inappropriate replacement of short-term insurance policies may be driven by conflicted remuneration in cases where an intermediary directs business to an insurer who is willing to pay a higher binder fee or outsourcing fee. This is exacerbated by the fact that in practice, despite relevant FAIS obligations, it appears that customers are often not asked to consent to the change in insurer and the new policy contract prior to the replacement taking place. In other cases, a policy may be cancelled by an insurer, but the intermediary is not able to find alternative cover for the customer. In these cases, particularly where the intermediary is collecting the premium, there is a risk that the intermediary may be tempted to “self-insure” the risk concerned by conducting unregistered insurance business.

Specific interventions aim to mitigate this risk by keeping the original insurer on risk until it has received confirmation that the customer is aware of the cancellation of the policy and has either consented to a new replacement policy or has been afforded a reasonable period to secure alternative cover. It is proposed that this reasonable period be set at 60 days.

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