AFRM Referral Partner Newsletter - 7 October 2019
In last month’s update I challenged a view expressed by ethicist, Professor Peter Singer, at the Best Practice Forum 2019 in Melbourne that fixated on the Financial Adviser Standards and Ethics Authority’s (FASEA) third ethics standard, which says advisers cannot “advise, refer or act” if a conflict exists. Professor Singer claimed a “grey area” was created by a perceived disparity in FASEA’s treatment of vertical integration in its Code of Ethics and Explanatory Statement.
Singer said FASEA’s explanatory statement; “explicitly says that [disclosure is] not enough. If you have a conflict of interest, you must not act; exposing it to the client and getting their consent is not sufficient.” I disagreed, suggesting the onus is simply to demonstrate you are acting in the best interests of your client. My argument was based on relevant sections of the Corporations Act 2001 (Pt 7.7 and Div. 2 of Pt 7.7A) and the related REGULATORY GUIDE 175, that stipulate priority must always be given to the client’s best interests BUT which also recognise that conflicts WILL occur during the course of providing advice to clients. I suggested we need to take a more holistic approach than simply focussing on FASEA’s Standard Three and take into account the overall effects of the new regulatory environment we now find ourselves in; as well as to take as our guide how the regulators themselves are interpreting and enforcing the regulatory regime. Accordingly, I was encouraged to see FASEA CEO, Stephen Glenfield, reported in the September edition of Professional Planner, also adopting a pragmatic view of how we should interpret our obligations under the FASEA Code. In relation to industry concerns about the real-world impacts of Standard Three, Mr Glenfield said we should not seek to interpret the Code “standard by standard” but instead look at “the totality of the standards” and how they guide the behaviour of individual advisers. “It doesn’t necessarily all fall to Standard Three,” Mr Glenfield said. He added that we should interpret the Code holistically – what all the Standards together require an individual adviser to do.
“We have a series of values that advisers need to meet that are all-encompassing and go over the various standards,” Mr Glenfield said.
As I said last month, as long as we ensure we are always acting in our clients’ best interests and we can, as ASIC has said: “…adequately demonstrate why the advice is appropriate and why it is in their clients’ best interests”; then we should be able to navigate our way through these changing times. And there is no doubt we are only barely beginning to see the full extent of the changes to come. In three separate public speeches since 30 August, ASIC Commissioner, Sean Hughes, and ASIC Chairman, James Shipton, have gone to great lengths to detail the Commission’s approach to tougher enforcement as being a key plank in its strategy to deliver “a fair, strong and efficient financial system for all Australians.” On 13 September, Mr Shipton told the Parliamentary Joint Committee on Corporations and Financial Services that ASIC has seven strategic priorities it is implementing to achieve its vision:
High Deterrence Enforcement Action
Prioritising the recommendations and referrals from the Hayne Royal Commission
‘Delivering’ as the primary conduct regulator for superannuation
Addressing harms in insurance
Improving governance and accountability
Protecting vulnerable customers; and,
Addressing poor financial advice outcomes.
Perhaps Mr Shipton’s most telling remark to the Parliamentary Joint Committee was:
“...there are high community expectations on not only the entire financial sector right now, but also on the regulators.”
So, it is safe to say ASIC wants to be seen to be strongly policing our sector and driving through change. That said; we are yet to see if the changes that come to pass are the changes they intend to design. For example, the pressure on insurance companies to ensure all products are financially sustainable – thus reducing the availability of highly attractive and generous ‘subsidised’ products – may well yield outcomes that are not as beneficial to consumers as ASIC intends. Will we see these products simply removed from the market, leaving consumers with more expensive insurance products that feature less generous schedules of benefits? That’s entirely possible.
This would be as a direct result of ASIC seeking to improve the financial sustainability of the industry because it believes this will, without doubt, provide better outcomes for consumers.
Makes me wonder how ASIC would go if it had to be held up to the same standards as it is asking of advisers. How it might “adequately demonstrate” why the changes it is implementing is indeed in consumers’ “best interests.” And for those of us following topics discussed at the recent 2019 AFA Conference, it seems I am not alone in wondering what the unintended consequences of impending regulatory change may be. Time will tell, as they say. At AFRM, we will continue to do the best we can at providing the highest levels of service to our clients and to you, our valued referral partners. You may recall that we like to take the time to “dig a little deeper” ‒ and indeed we do ‒ but that attitude is not restricted to our discovery meetings with clients. That is also our approach to the detail within insurance contracts. We take pride in how well we understand the impacts and implications of the various kinds of products, definitions and features out there in the marketplace. As an example, please take a few moments to read the brief Case Study below which underscores the importance of understanding the difference between “Any” occupation versus “Own” occupation definitions within Total and Permanent Disability insurance; specifically how understanding the client circumstance aligns to the definition ‒ ultimately leading to a positive, life-changing difference to a client’s life.
Until next time, live your life well!
Managing Director AFRM
At AFRM we are constantly working to raise awareness among our clients to ensure they fully understand the terms and conditions of their cover.
This is particularly important when it comes to the terms of Total and Permanent Disability (TPD) cover.
Even among advisers, it is generally assumed it is difficult to meet the definition of TPD for a successful claim but much of that assumption is based upon TPD policies that feature “any occupation” clauses rather than “own” occupation clauses.
And it is important to know that all superannuation group TPD policies are “any” occupation policies, while you can still obtain retail “own” occupation TPD policies through your specialist risk adviser.
Confusion caused by non-standardised use and definitions of both types of TPD policies have been around the industry for years.
ASIC’s 2016 REP498 Life insurance claims: An industry review [Page 77] highlighted the issue:
271: The variations between the policy definitions may be confusing for policyholders and not enable simple comparison. For example, the impact of ‘any occupation’ clauses (as opposed to ‘own occupation’ clauses) is crucial in terms of outcomes for policyholders. A policyholder with the benefit of an ‘own occupation’ clause may fall within the definition of TPD if they cannot perform their own occupation.
272: However, the same policyholder with an ‘any occupation’ clause will only fall within the definition of TPD if they cannot work in any job, and meet one of the elements…as well (e.g. be unable to perform two or three activities of daily living) to be deemed TPD. Similarly, a clause that states that a policyholder needs to be ‘unable’ to work again is significantly different to a clause that states that they need to be ‘unlikely’ to work again.
273: The details of TPD-related claims disputes we have examined illustrate the complexity of these claims and the various criteria that a policyholder needs to meet to fall within the definition of TPD…
The purpose of this case study is to illustrate how taking out retail “own” occupation TPD cover can make a hugely positive difference to your [or your client’s] life if you suffer an injury at work.
It is a living example of how a client can not only successfully claim on TPD but can also go on to have a rewarding and successful new career thanks to the financial boost provided by having the appropriate type of TPD cover in place.
Tom [name changed to protect client privacy] was referred to AFRM by his accountant in 2014. In his mid-30’s, Tom was working full-time as a cabinet maker and on the side, he operated a part-time photography business.
After reviewing his circumstances, AFRM confirmed “own” occupation TPD cover was the best form of TPD cover for him based upon his full-time role as a cabinet maker.
In 2017, Tom contacted AFRM seeking advice about significantly changed circumstances in his life.
He had been made redundant from his cabinet-making role, money was tight, and he was considering cancelling his insurance cover as a “luxury” he could no longer afford.
After consultation with his AFRM adviser, Tom’s cover was not cancelled. AFRM’s unique level of insurance product knowledge allowed us to modify Tom’s TPD arrangements to best suit the circumstances he found himself in.
His new TPD cover was converted to a “split” ownership structure to allow the bulk of premiums to be funded from Tom’s superannuation, while preserving the “own” TPD definition within his policy.
A few months later Tom was working again full-time but not too long after starting his new role he badly injured his shoulder at work. As a workplace injury, WorkCover was helpful and supportive, assisting him secure an alternative role on “light duties.”
About six months later, in 2018, Tom once again was in touch with AFRM to conduct a review of his risk mitigation cover. During Tom’s review meeting with his AFRM adviser, he informed AFRM for the first time that he had had the workplace accident six months prior and that he had been told by doctors he would never be able to return to his former role.
Amid a Workcover claim and seeking legal advice against his employer about the accident, it had never even occurred to Tom that his retail life insurance portfolio might be of assistance in his current circumstances.
AFRM subsequently managed filing a claim, on Tom’s behalf, on his TPD cover.
Despite continuing to work productively in two roles (his revised “light duties” full-time role along with his part-time photography business), the “own” occupation status of his TPD cover allowed him to successfully claim “total and permanent disablement.”
Again, the only reason he could do so was because he had “own” definition TPD. The claim assessment criteria were against his likelihood of ever again performing his original role as cabinet maker. Doctors had already told him he wouldn’t be able to do that again and so after gathering and submitting the relevant medical reports, his insurer accepted the claim.
Soon after, an “emotional and rather stunned” Tom learned he had just been paid a claim well in excess of $200,000 that would be deposited into his bank account within the week. All of this was made possible thanks to good advice ensuring he had the right retail cover terms for his individual set of circumstances.
The welcome additional funds had a major impact on Tom’s life. He had not been enjoying his new “light duties” role. The injection of funds relieved Tom’s financial pressures and allowed him the opportunity to focus more on his creative passion of photography and to grow his photography business, such that it is now his primary vocation.
Tom’s shoulder injury continues to inhibit what he can do physically. For example, it substantially restricts his capabilities when it comes to in-water surf photography, which he really enjoys.
However, the funds made available by his TPD payout have provided Tom with the opportunity to investigate potential stem cell treatments with the hope of one-day regaining full use of his shoulder.
Tom’s metamorphoses from cabinet maker to creative professional photographer was only made possible because he had the right advice up front and the right support when the time came to make a claim ‒ a claim he did not even realise he was entitled to until his AFRM adviser told him.
So, if we have a moral to this story it is perhaps a simple one. Having insurance is good, having the right insurance can make all the difference in the world.
Of course, we understand that the circumstances of every client is different and that the recommendations made for each client must be those that are in each clients’ best interests. However, where it is appropriate, having retail TPD cover with “own” occupation terms makes it much easier for a client to make a successful claim versus having TPD cover with “any” occupation terms.
As Tom’s case highlights, the right insurance can provide the financial freedom to make your own decisions. The financial support Tom received allowed him to explore a creative, successful and most importantly, enjoyable venture that he would not have had the opportunity to otherwise.
Having the right risk mitigation strategy in place really is about a couple of simple questions: Do we want to enjoy freedom of choice (financial freedom)? Or are we prepared to have our life dictated to us by circumstances largely outside our control (injury/illness)?
It is also crucially important to understand that if you or your client has group TPD cover through a superannuation fund, then this TPD will always be under the “any” occupation terms by law. This is the only TPD occupation definition permitted under superannuation legislation.
In closing, perhaps it is also relevant for our referral partners to note that while there is a perception out there that TPD is very difficult to claim on; cases such as Tom’s highlight that by ensuring your clients have “own” occupation TPD cover with a retail insurer, when appropriate, you can ensure the benefits of such cover are much easier for your client to access should the need ever arise.