Speaking at the Financial Planning Institute’s (FPI) annual convention, the FSB’s Leanne Jackson said the maximum penalties long-term insurers would be allowed to impose when their clients move or terminate savings policies would be reviewed and further reduced, if not canceled altogether.
Jackson, who heads up Treating Customers Fairly (TCF) at the FSB, pointed out that these charges had already come down significantly and were capped at 15% of a client’s invested value.
Retirement annuities in particular were historically sold with high upfront commission paid to the insurance brokers who sold them. Broker commission is calculated as a percentage of the contributions paid by the client over the lifetime of the policy. Prior to 2009, commission could be paid all in one go to the intermediary at policy inception.
When the client then wanted to terminate their RA or move the investment to another insurer, the insurer would claw back broker commission and costs by slapping the client with a hefty penalty. As of 2009, brokers can now receive only half the commission upfront, while the rest must be paid on an “as-and-when” basis, as clients pay premiums each month.
Although this has helped, the penalty problem persists and is made worse by the dubious practice of “double dipping”. This occurs where product suppliers apply early termination charges twice, say for instance when a client reduces their monthly contributions (strike one) and then later decides to cancel the investment altogether (strike two).
While both instances can still legally trigger a termination charge, Jackson said that a recent FSB directive prohibits the cumulative effect of these charges from placing the client in a worse-off position than they would have been had the more extreme event (policy cancellation) happened first. She said that this was happening in cases where insurers were applying the maximum penalty twice. “TCF is not just a case of looking at fair outcomes for customers, but also finding areas where the legal system is not supporting these outcomes and reviewing that,” Jackson said.
In response to a question, Jackson said that in some instances financial advisors were not being paid enough, since we did not yet have a system that respects and rewards advisors who genuinely add value to their clients.
“These advisors have the most to gain and the least to fear from an enhanced focus on customers,” Jackson said, referring no doubt to regulation like TCF and the Retail Distribution Review (RDR), which seek to remedy unfair treatment of customers arising from poor product design, ill advice and conflicts of interest.
The industry continues to eagerly await the FSB’s release of the RDR discussion paper, which was expected in May.