Churn is different to replacement: Partners says

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Partners Life has hit the road and told advisers what it thinks is churn and what is legitimate replacement business. Benn Bathgate went along to find out the answers.

Tuesday, May 22nd 2012, 10:14PM 1 Comment

by Benn Bathgate

The simple difference between churn and replacement business is that with the former the adviser benefits and when it is the latter the benefit is for the client rather than the adviser.

Partners Life technical manager Steve Wright said its seminars on the topic were "not an invitation for open churn for all or any business to Partners Life" but an attempt to clarify the situation around replacing insurance policies - especially in the wake of the Financial Advisers Act (FAA).

Wright said churn could be defined as replacing business where there was no material benefit for the client. He was equally clear, however, that under the FAA, advisers were obliged to recommend replacement of policies if it was to the clients benefit.

He also had a warning for advisers who may be reluctant to replace for fear of the ‘churn' label.

"There are even bigger risks leaving a client paying premiums for a policy that's not doing the job," he said.

Wright highlighted improved policy benefits as the main reason to consider replacement business when they were "patently for the clients' benefit."

He said when a client's needs could be addressed by a move, "you're obliged to."

A large portion of the seminar Good Returns attended focused on some of the less legitimate reasons for replacing business and the legal dangers they posed to an adviser, as Wright raised the spectre of Armitage v Church, saying it "raised the bar considerably" in terms of how the courts viewed an advisers' legal obligations.

"The potential consequences of getting this wrong are great," he said.

He highlighted opting for policies with higher research rankings as the least defensible reason for change, noting rankings change "sometimes on a monthly basis" and that advisers' research into the appropriateness of policies depended on the clients' circumstances.

He also stressed the importance of thoroughly checking the current policy wording for legacy benefits no longer available and any potential loyalty benefits that could be lost.

He also called on advisers to put any new policy wording under the microscope.

"If you rely only on the word of insurance company reps, that's dangerous. They're not responsible for your clients," he said.

The problematic issue of client non-disclosure also had to be considered, as well as the loss of protection for policies more than three years old, Wright said. Under the Insurance Law Reform Act 1977 once a policy is three-years old, non-disclosure has to be deemed fraudulent to avoid a payment.

Wright said the issue of churn was on radar of the Australian regulators with speculation around a five-year commission ban on replaced business.

He said he wanted the advice industry to properly get to grips with issues around replacement business to avoid the regulator stepping in here, and he had a warning for any adviser targeted by the Financial Markets Authority (FMA) for churning.

"You don't want to be on the FMA's radar, once you're on that, who knows how long you'll be on it."

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz

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