RFA warnings proportionate to misconduct - FMA

The warnings the Financial Markets Authority (FMA) issued to four registered financial advisers (RFAs) for conduct obligation breaches were proportionate to the misconduct, the regulator says.

Last Wednesday, the FMA released a report into life insurance replacement business, which focused on the conflict of interest that can be driven by soft dollar incentives such as offshore incentives.

The majority of the FMA’s report deals with the outcomes from the inquiries into 17 RFAs – the concerns centred on policies being switched or replaced after commission clawback periods ceased, which in turn lined up with other incentives being offered by insurance providers. As part of that report, the FMA announced it has issued warnings to RFAs who had breached obligations of care, skill and diligence under the Financial Advisers Act (FAA).

In the report, the FMA said: “We took into account our discussions with advisers and acknowledged that a breach of the care, diligence and skill obligation is not an offence under the FAA. For these advisers (who received the warnings) this was also the first time the FMA had reviewed their conduct.

“The message within these warnings is also relevant for the whole insurance sector. In future, where we find this poor conduct and unacceptable standards of client communication and record-keeping, we will take action and use stronger regulatory responses.

“It was both striking and concerning that some of the RFAs we reviewed did not even recognise that conflicts of interest can arise from incentives and commission structures.

“We also noted that the inconsistent standards in the current regime mean that there are insufficient controls on RFA conduct when it comes to managing conflicts of interest. This also points to the broader conduct issues that insurance providers are encouraging through the range of incentives they offer advisers.

“We look forward to the introductions of the new financial advice regime, as the consistent level of standards, disclosure and conduct proposed for all advisers in the FSLA Bill will help to address some of the issues in this report.”

The FMA said it would next focus on ensuring that advisers recognise their obligations to exercise care, diligence and skill, and maintain detailed client records. The FMA added that it expected the insurance industry as a whole to recognise the need to manage conflicts appropriately.

FMA expectations of all financial advisers:

• Awareness and adherence to the FMA’s guidance on care, diligence and skill.
• Advisers need to explain to clients the costs, benefits and consequences of replacing insurance policies – moving from one product to another.
• Advisers need to demonstrate how they have met their care, diligence and skill obligations.
• Advisers need to show they have met compliance obligations by ensuring they have kept. appropriate records of their client communications and provide these records to clients in a way that can assist them with their decision making on insurance. The FMA expects to be shown records of conversations and communications, not simply told “they have taken place”.
• Advisers need to read the Guide to the FMA’s view of conduct that applies to all licensed providers under the Financial Markets Conduct Act. While this guide doesn’t currently apply to RFAs, as they are not licensed or authorised providers under the FAA, the FMA considers that all RFAs should be aware of its contents.

The FMA added that in general it was disappointed that among the advisers that were reviewed there was a lack of awareness or recognition that receiving commissions and incentives to recommend products and hit sales targets was a conflict of interest.