The original RDR Proposal on replacements provided that “…long-term insurers would be prohibited from paying any form of commission or fee to an intermediary in respect of the replacement of life risk policies. Intermediaries will be prohibited from accepting any remuneration other than an advice fee, subject to all applicable requirements for such advice fees, in respect of such replacements.”
In response to “…extensive and widely divergent comments, ranging from strong support for the proposal to outright rejection…” the FSB has accepted that it will not be feasible to prohibit commission on replacement policies in the absence of further refinement to the advice fee framework.
Of particular significance is the view that the proposal does not distinguish between churn and “good” policy replacements which are in the best interests of policyholders.
Commentators were concerned that the proposal would have the unintended consequence of dis-incentivising appropriate replacements.
Some adviser representatives also made the point that product suppliers who accept new replacement business should also shoulder some responsibility for managing the risks of inappropriate replacements.
Whilst accepting that implementation of the proposal needs to be delayed, the FSB remains seriously concerned that current FAIS based disclosure requirements, on their own, are insufficient to mitigate the risks of inappropriate replacement advice, incentivised by the opportunity to earn up-front commissions.
The Regulator proposes, as an interim Phase 1 measure, to impose replacement monitoring obligations on the insurers concerned. These monitoring obligations will be a precondition for releasing commission on replacement policies, over and above the disclosure obligations imposed on the advisers themselves. This is consistent with the TCF aim of shared product supplier and adviser responsibility for advice outcomes, and will mean that insurers who benefit from inward policy replacements will not be in a position to “turn a blind eye” to poorly motivated replacements. It should therefore improve the quality of replacement advice records and pose a deterrent to inappropriate replacements.
These replacement monitoring obligations will apply to long-term insurance risk policies that entitle the adviser to up-front commission. Although recurring premium savings policies also currently attract a portion of up-front commission, they will not be included in the scope of this requirement in view of the proposed prohibition of commission in respect of such policies which would significantly reduce the risk of replacement driven churn in this market.
In addition, new conduct of business regulatory reporting requirements for both insurers and advisers will include reporting requirements in respect of insurance replacements. In respect of FSPs, these returns are intended to replace and enhance the current FAIS compliance reports, which will in future have a different format and purpose, and will include reporting on replacement advice details and volumes.
Consultation on these returns is planned for the first quarter of 2016.
For full details on how the FSB plans to monitor replacement of life risk policies, please click here for an extract from the Phase 1 Update document.
What are the Implications?
One positive aspect concerns the fact that specific standardised requirements for the content and format of a “replacement policy advice record” will now by laid down by the Regulator. Whilst the industry has its own documentation in place, it is not enforceable, and many pay less than lip service to it.
One also has to wonder whether the fact that the new (receiving) insurer is tasked with reviewing the replacement policy advice record, and deciding whether it complies with the applicable disclosure standards, will work in practice. Perhaps the insurer who loses the business would be far more objective in making such a determination?
There is also a requirement that the new insurer must provide the insurer of the replaced policy with a copy of the replacement policy advice record within a stipulated period after satisfying itself that the advice record complies with the applicable standards. There does not appear to be a form of appeal where the “losing” insurer can contest the decision by the new insurer.
For life offices, this is yet another massive administrative burden, requiring extensive business process changes, in addition to their current reporting requirements stemming from the special audits conducted by the FSB at the end of last year.
How will it affect advisers?
The new insurer may issue the policy concerned in accordance with its normal new business processes, but will not be permitted to pay any commission, fee or other remuneration to the adviser concerned unless and until the confirmation, outlined above, has taken place. Should an appeal mechanism be introduced, as suggested above, this could delay payment to the adviser even more.
Consultation on these proposals
This is planned for early next year, and representative bodies will need to study the practical implications very carefully to ensure that the interests of their members are considered before it is implemented