Advice obligations

IFSO Case Study

Donald*, a financial adviser, met with Mr and Mrs Jones* to review their life and trauma cover. They were concerned about increasing premiums and asked Donald if they could have a policy with level premiums.  Donald provided a quote and it was agreed that they would apply to Insurer A, for life and trauma cover. 

Donald helped Mr and Mrs Jones complete the application.  The insurer accepted the application and the cover commenced. Acting on Mr and Mrs Jones’s instructions, Donald cancelled their existing policy.

A few weeks later, Mr Jones was admitted to hospital with renal failure, requiring a transplant and dialysis treatment. Mr and Mrs Jones made a claim to Insurer A for trauma cover.                                       

Insurer A avoided Mr Jones’s policy from inception, because he had not told it that, five years earlier, he’d had a hospital appointment about his renal function and was to have follow-up tests. Mr Jones had been told he needed to remain on hypertension medication for life, or he would risk further kidney damage.  Insurer A declined Mr and Mrs Jones’s request to reinstate their policy. 

Mr and Mrs Jones made a complaint about Donald. They didn’t believe it was their fault that Insurer A had avoided their policy.

Donald said he was not responsible for Insurer A avoiding the policy. Donald denied that Mr and Mrs Jones had told him about the kidney appointment, or that another insurer declined to offer cover. He said he had followed his standard process regarding the application and had warned Mr and Mrs Jones about the consequences of not providing full disclosure.
Did Donald meet his statutory obligations?

Section 33(1) of the Financial Advisers Act 2008 (“FAA”) states a financial adviser must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. Section 33(2) states that the degree of care, diligence and skill that a reasonable financial adviser would exercise, should be considered according to: (a) the nature and requirements of the client; (b) the nature of the service and the circumstances in which it was provided; and (c) the type of financial adviser.

The Code of Professional Conduct for Authorised Financial Advisers, provides that: an adviser must place the interests of the client first and must act with integrity (Code Standard 1); and an adviser must take reasonable steps to ensure that the service is suitable for the client (Code Standard 8).

Donald said, when he completed the application, he asked the health questions and ticked the boxes accordingly. Mr and Mrs Jones said they told Donald about Mr Jones’s renal appointment and that another insurer had declined cover.  They assumed he had written this on the application form. However, Mrs Jones had earlier said that they had forgotten about the renal appointment.

The only available documentary evidence was the application, on which Donald had ticked “No” to a question asking about renal problems. Mr and Mrs Jones signed the application declaring that, if the information was not in their writing, they had checked and approved it as being accurate and complete.  

There was no evidence to show that Mr and Mrs Jones told Donald about Mr Jones’s renal history or the declined application.  Donald had not failed in his obligations in this regard.

It was also clear from the documents that Donald had warned Mr and Mrs Jones about the implications of replacing their existing policy. Specifically, that if they did not provide full disclosure, they might have no cover under the Insurer A’s policy.

The IFSO Scheme case manager said Donald met his statutory obligations to Mr and Mrs Jones; he provided financial advice with the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. Further, he met the Code requirements to put Mr and Mrs Jones’s interests first and to ensure the advice was suitable.

Lessons for advisers

Understand your duties 

•    Your duties to your clients are set out in the Financial Advisers Act
    (FAA), The Authorised Financial Advisers Code (AFA Code), the
    Consumer Guarantees Act (CGA), and common law.

•    Best practice is to have good processes for following up on client
    instructions and records that document that your processes
    were followed.

•    Good records, especially file notes of meetings, provide proof of your
    version of events. They can establish that you used the care, diligence,
    and skill of a reasonable financial adviser.


*Not real names


Financial advice complaints can lead to positive change
Last year, the Insurance & Financial Services Ombudsman Scheme (the IFSO Scheme) received the highest number of complaints in nearly 20 years, with 314 complaints and 3227 complaint enquiries. House insurance issues made up the highest proportion of investigated complaints (27%), followed by vehicle (13%), travel (13%), and health insurance (10%).
The number of complaints about financial advisers remained relatively low, with 10 complaints (3%) and 73 complaint enquiries.  

“While no single issue has caused the rise, it is a sign of increased consumer awareness about being able to make complaints,” says Karen Stevens, Insurance & Financial Services Ombudsman. “Our resounding message is that complaints are not all bad.”  

“We encourage the industry to view complaints as an opportunity for valuable feedback which can improve their business. Lessons can be learnt and complaints can lead to positive change – including more informed consumers and better business practice, which means future issues can be managed and complaints can be avoided.” 

Application forms and non-disclosure
“It’s important that financial advisers and brokers understand that most clients won’t know about their duty of disclosure, including what information is material,” Stevens said. “More importantly, most clients won’t understand the consequences of failing to disclose material information, which can be dire.” 

“Financial advisers have a key role in educating clients about their disclosure obligations and the consequences of failing to disclose,” says Karen. “Completing application forms on behalf of clients is very risky. We have had numerous complaints that highlight this risk.”
“Keeping good records is critical,” says Karen. “In the event of a complaint, good records make it easier for financial advisers to resolve things before they escalate to the IFSO Scheme.” 

December 2017

Training & Qualifications

Professional IQ College offers workshops, online courses, webinars and qualifications.
For upcoming events:

Click here

Knowledge Base

Where members can access industry Resources & Media Content

Click here