Non-disclosure case highlights need for better records
A life and health insurance adviser has agreed to pay $1000 in compensation to a client who complained to Financial Services Complaints Ltd that she had not been adequately advised about the risks of non-disclosure.
Friday, October 29th 2021, 2:20PM 
29 Comments
by Matthew Martin
The complaint, while not fully upheld by Financial Services Complaints Ltd (FSCL), highlights the need for advisers to keep very good records of the entire advice process and for consumers to be sure they fully disclose any pre-existing medical conditions.
In 2010, Jane (details of the complainant and adviser are confidential) met with her insurance adviser to review her life and mortgage protection cover.
After carrying out a needs analysis, the adviser recommended that Jane move to a new insurer and take out life, trauma, and mortgage repayment cover.
A year later, they met again and the adviser recommended that Jane move to another new insurer so she filled out a new proposal but did not disclose pre-existing health issues including Type-2 diabetes.
Two years later, Jane fell ill and made a claim under her mortgage protection insurance that the insurer declined because Jane had failed to disclose her diabetes and suffered some complications from it. The insurer also cancelled Jane’s policies.
Jane said she was unhappy with the adviser’s advice when she moved to the new insurer and complained the adviser had not adequately advised her on the risks of non-disclosure both when she moved her insurance in 2010 and again in 2011.
Jane wanted the adviser to compensate her for all the premiums she had paid to the new insurers and compensation for stress and inconvenience.
The adviser did not agree and said Jane had answered no to the questions about pre-existing health conditions and felt he had been acting in Jane’s best interests when he recommended that she move to a new insurer who would offer her better benefits for a lower premium.
FSCL said in its decision that it was concerned the adviser had not prepared any statement of advice when Jane applied for her new insurance cover.
However, the FSCL was satisfied it was more likely than not that the adviser had advised Jane of the risks of non-disclosure.
The adviser had sent Jane a copy of her completed application form, pointing out she should re-read the information about her duty of disclosure.
The adviser also had notes of a discussion with Jane about an old neck injury and whether or not a new insurer would accept a claim relating to the injury.
Jane had suffered from diabetes and complications for some years, and FSCL thought it reasonable to expect Jane to know she should declare her diabetes to a new insurer.
"But, in this case, the adviser’s records were severely lacking because he had not done any statement of advice or product comparison between the old and the new insurers," the FSCL decision states.
"We decided that the flawed advice process had caused Jane some stress and inconvenience.
"We found that the shortcomings in the adviser’s advice process had not caused Jane a direct loss," FSCL states.
"Jane’s failure to disclose her diabetes was the cause of her loss.
"However, we said that the adviser should pay compensation of $1000 for the stress he caused Jane as a result of his poor advice process."
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Comments from our readers
On 30 October 2021 at 9:47 am Matron said:
Hindsight is a wonderful thing. It's not surprising that a Statement of Advice was not produced back in 2010/2011.
Has FSCL been guilty of applying today's standard of care to a time of significant change when the Financial Adviser Act had just been implemented? This is not condoning the behaviour but just an observation of the time.
On 30 October 2021 at 12:20 pm w k said:
during my training, was taught insurance agent is the primary underwriter, and also qualify prospects which i've identified 2 categories - prospects and suspects. that was nearly 40 years ago, but still relevant today. i define suspects as "short term gain, long term pain" which should be avoided at all costs.
i tell new advisers, record keeping is important. but qualifying your prospects is just as, if not, more important. you have to make it a habit to offload the suspects.
On 30 October 2021 at 2:42 pm JPHale said:
Agree with Dirty Harry, Matron, & W K.
The long time diagnosis and the frequency of recent applications raises a serious question about the adviser having any fault at all.
If they didn't know about the condition, how were they to advise?
Record keeping is important, at the same time it does not prove something that doesn't exist, the fundamental challenge in he said she said that advisers are still exposed to with the best documentation.
On 31 October 2021 at 1:11 pm AKC said:
Agreed Dirty Harry. Advisors Beware. This is the thin edge of the wedge. I don’t condone churning and we all must keep good records. But to fine an advisor for doing his job is an incompetent result. It’s NOT the advisors fault that this client lied, twice. Call a spade a spade. Where is accountability. Even allowing this lying applicant to lodge a claim is ridiculous.This unfortunately is going to happen more and more. This client LIED on the application form and this "professional" group of "judges “cannot see this!!!!. Come on use whatever brain you have. On 31 October 2021 at 9:02 pm w k said:
say, talking about record keeping and a fine for an advisor for doing his job, anyone has any idea why the advisor with 40 years in the biz who was "caught" had name suppression when she didn't want it? while virtually every other institution, practice and advisers caught were named.
just curious.
On 1 November 2021 at 8:00 am Murray Weatherston said:
I think this case is being misinterpreted.
As I read this media report, the adviser did not get fined for their advice. They did not pay compensation for their advice.
Rather there is a kicker in the EDRS rules where the scheme can make the adviser pay an award of I think it is up to $2000 for stress humiliation or inconvenience in making the claim, even where the complainant "loses"* the case.
*Loses is meant in the sense of doesn't win.
On 1 November 2021 at 9:14 am Amused said:
Well said Dirty Harry. 100 percent in agreement with your comment. On 1 November 2021 at 10:59 am Dirty Harry said:
@MW
suggest you re-read this media report.
Specifically the last 5 sentences.
'lack of SoA, record keeping, poor advice process' yada yada blah blah.
I don't see how any SoA, records, or the most expensive processes under the sun could have saved any adviser from this client's willful and repeated non-disclosure.
The adviser's failings (as judged by FSCL) had nothing to do with the outcome at issue, and therefore whether or not we do an SoA, and product comparisons etc is moot.
BTW: Were these things REQUIRED then? Which version of the code applied to an RFA advising class 2 product in 2011?
For those of us who also do make notes about things like the neck issue, and send a copy of the app, and point out the ND risks, and do keep some records... There is no safe harbour here.
She lied.
He paid.
WT actual F !?!
I see no link between the adviser's advice, and the client's "stress".
If the cause of the client's "loss" was her own failure to disclose diabetes (TWICE!!!), and the adviser was deemed to have "more likely than not ... advised her or the risks of ND" then how on earth has the advice process itself caused the client to suffer stress?
The reason this hits a nerve is because it could be any of us.
Any process could be "poor" under this judgement.
On 1 November 2021 at 11:02 am Dirty Harry said:
Furthermore
This goes back to advice given in 2010 and 11.
The claim event was about 2013.
Why is this now, 8 years later, being decided?
Measured against which regs, which code version?
big question:
Are we all now effectively on notice that any advice process could be deemed "poor" by some random DRS case manager - not FADC, not FMA - after the fact, measured against whatever current or future, or made up (by the DRS on the fly), standards apply?
On 1 November 2021 at 11:25 am w k said:
@dirty harry, beware, someone may break into your house, got caught by the law, then sue you for not displaying a warning sign prominently on your premise that you will report to the police, and you are liable for hurting his stress, emotions, etc.
just saying.
On 1 November 2021 at 11:52 am Murray Weatherston said:
@Dirty Harry
Here is the resolution in FSCL's own words according to the case note on their website
"We found that the shortcomings in the adviser’s advice process had not caused Jane a direct loss. Jane’s failure to disclose her diabetes was the cause of her loss.
However, we said that the adviser should pay compensation of $1,000 for the stress he caused Jane as a result of his poor advice process.
The parties eventually agreed to settle on the basis that the adviser would pay Jane $1,000 in compensation"
I reiterate my earlier comment.
It seems to me the stress etc compensation is akin to a consolation prize for a complainant who loses their dispute.
On 2 November 2021 at 10:01 am Amused said:
Hopefully the adviser in question has since elected to switch to a different dispute resolution scheme. After this ruling by FSCL I wouldn't want to continue belonging to their scheme when it comes to potential non disclosure by clients on their insurance applications.
"We found that the shortcomings in the adviser’s advice process had not caused Jane a direct loss. Jane’s failure to disclose her diabetes was the cause of her loss".
So the $1,000 compensation awarded to "Jane" is being paid to someone who by FSCL's own admission has failed to disclose. WTF?
Thankfully the majority of people are open and honest with insurers when applying for cover unlike the "Jane's" of this world.
On 3 November 2021 at 10:32 am JPHale said:
@DH excellent points.
One of the things I have said a number of times under the new rules, regardless of your past association with the client you are advising.
If you review a client and endorse the client holding on to the policy or contract they have you are now responsible for the past advice and position on that policy.
If you have not covered off non-disclosure or worked through investigating non-disclosure, you potentially have an unrealised risk.
Which this example highlights.
The compensation is being paid for stress caused by the adviser's process, or lack of process.
Completely arbitrary and one that we will struggle to defend as I commented earlier, proving a negative with documentation is rather difficult.
On 4 November 2021 at 6:52 pm Do what is right said:
How do any of you defend the adviser. That person is a scum bag and creates distrust in the rest of us. The adviser should be struct off for either incompetence or dishonest behaviour.
Of course, those of you who feel churning business is okay will disagree with me. But, you also are responsible for the bad press we get.
On 5 November 2021 at 11:14 am JPHale said:
@DWIR Any one of us could have been caught with this, it's not defending the churning, or even calling it churning, it is the reality that the diabetes was not disclosed on what looks to be two occasions.
The FSCL ruling on this has stated no issue with the adviser conduct on disclosure. That's not to say there were no shortcomings in the processes the adviser used or the issue of moving cover 12 months later, but the disclosure issue was the core issue.
It is reasonable that you will sometimes move business 12 months in, especially if the insurer significantly increases premium and the client is both unhappy with it and there is a reasonable alternative elsewhere.
Partners Life increasing premiums in 2020 resulted in a 37% increase in premiums for some of my clients and it was their first year anniversary, so it was a difficult conversation to have with them. I didn't move anyone as it didn't stack up to, but plenty of other advisers took the easier path to re-write cover to other providers through last year.
Is it churn or good client service? It's difficult to tell without looking at the client file. And many of the assertions about churn when looked at in detail are not always about churn.
I've moved maybe six of my existing clients to alternative providers in 10 years for client-driven reasons of cover availability, significant premium savings, or just plain better underwriting, certainly not churn. But other advisers with older and more significant client bases are likely to have more movement as it can be significantly beneficial to the client.
Not to mention that the majority of new clients for advisers that have existing cover are moved to different providers as part of that review. It's not churn if it is driven by client needs and improved solutions, the exact outcome the FMA desires from servicing.
On 5 November 2021 at 11:35 am Dirty Harry said:
@do what
per my first comment here
"We could debate all day about replacing a 1 year old policy, but the reality is this client went through the application process twice"
Stay on topic please.
This adviser was found to have adequately advised her of non-disclosure risks on both occasions. That's what matters here. The relative merits of the reasons behind the two instances of replacing policies are neither discussed nor relevant to the matters being considered for the Adviser involved being found to have given "poor advice" or undertaking a "poor process". If it was relevant the findings would have said so.
AND those findings of "poor advice/process" appear to be solely in the subjective opinion of the FSCL - no ref to Code, FA Act, S33, 'reasonable care and skill', prudent person etc.
(BTW to conflate my statements with me being OK with churn is a giant leap too far. Pull your head in.)
You might think it looks like poor advice to replace an existing policy only to then replace it a year later, and with the full facts I might well agree. But that is not what this case was made out to be about.
- The adviser adequately advised the client of non-disclosure risk.
- The adviser was found to have shortcomings in their record keeping (demonstrating product comparisons and statement of advice).
- Those shortcomings did not cause the client to suffer a direct loss.
- The client's failure to disclose diabetes was the cause of her loss.
On 5 November 2021 at 1:04 pm Matron said:
One wonders if the actual Ombudsman, IFSO, would have reached the same conclusion and direction as FSCL.
Silly musings really as IFSO would have stayed on point and this conversation wouldn't have arisen.
On 5 November 2021 at 2:31 pm Amused said:
@ Matron
My thoughts also. If another dispute resolution scheme other than FSCL had been involved i.e. IFSO I don't believe that "Jane" would have received $1,000 compensation. By FSCL's own statement - "We found that the shortcomings in the adviser’s advice process had not caused Jane a direct loss. Jane’s failure to disclose her diabetes was the cause of her loss."
As Dirty Harry has correctly noted "Jane" is the individual at fault here i.e. non-disclosure to the insurer. Case closed!
On 6 November 2021 at 12:42 pm Murray Weatherston said:
IFSO also has power to recommend payments like FSCL did, See Cl 14.4 of their terms of reference
14.4 In addition to, or as an alternative to any remedy under paragraph 14.1,
the Scheme may:
a) find that the Participant should make a payment to the Complainant of an amount not exceeding $3,000 where:
i) the Complainant has incurred special inconvenience or expense in making and pursuing the Complaint; or
ii) in the opinion of the Scheme, it is appropriate to compensate the Complainant for incidental expenses incurred by the Complainant or for any loss arising from any delay in settling the claim; or
iii) in the case of a complaint relating to a repossession under Part 3A of the Credit Contracts and Consumer Finance Act 2003, in the opinion of the Scheme; it is appropriate to compensate the
Complainant for non-financial loss, stress, humiliation, and inconvenience;
b) suggest that the Participant undertakes reasonable steps to improve
its processes.
On 9 November 2021 at 2:12 pm Tash said:
Murray
Just which of those three sub sections in the IFSO terms you mention do you think would have applied to the circumstances in this FSCL case? I have read many IFSO determinations and at least they seem to apply rational and evidence based, legal principles to decisions.
On 9 November 2021 at 5:33 pm Murray Weatherston said:
Tash
Clearly not (iii) as it is limited to complaints about CCCFA.
We don't know the full facts and events of the FSCL case. But I reckon an EDRS could bend (i) or (ii) as it wished if it felt the complainant deserved at least something from the adviser because of something the adviser had done or hadn't done. "Special inconvenience" could I believe be argued to include stress or humiliation .
On 10 November 2021 at 10:37 am Tash said:
Hi Murray
Thanks
Surely any determination must be made on actual evidence of action or inaction AND a suitable causal link to the harm (stress or humiliation or actual monetary loss). "Bending" the actual position or ignoring facts and evidence, or lack thereof, to achieve a desired outcome is wholly inappropriate if justice is to be objectively, fairly and properly served.
Am I correct in believing there is no ability to appeal a manifestly wrong DRS decision?
Perhaps this is the point to having multiple DRS schemes, participants can move if they don't like the philosophy.
On 11 November 2021 at 8:08 am Murray Weatherston said:
Tash
You are correct that that there is no ability for a member to appeal a formal ruling by their EDRS.
Someday an adviser has going to have $350,000 awarded against them with no appeal - must be one the few instances where a first level decision is the final decision. Clearly an anti-adviser bias.
Note in the subject case, it appears that the payment under what I will call this "special inconvenience" clause was one made by agreement between the adviser and the client - FSCL possibly suggested that would be part of their formal ruling, and the adviser saw the "writing on the wall". {I would made the same decision as the adviser BTW.)
The point of highlighting this is there would have been no ruling by the EDRS to appeal anyway.
Also it seems to me that it is not necessary for the EDRS to have found the adviser has done or not done something that that has caused the client loss before the EDRS can make a "special inconvenience" award.
That's like "Ms Adviser, we have not found you negligent so you don't have to make good the client's loss, but we think you should make your client a "special inconvenience" payment."
It would be illuminating to this discussion if the four approved EDRS schemes would answer the following questions
1. On how many occasions have you made such a special inconvenience order?
2. In how many of those cases did you not make a substantive finding against the adviser.
3. What is the minimum, maximum, median and average "special inconvenience" award you have made.
I won't be holding my breath though for any answer.
On 11 November 2021 at 8:58 am Dirty Harry said:
SHE. SHOULD. HAVE. GOT. NOTHING!!!!
In fact, her non-disclosure is not only the sole cause of her "loss", her malicious and baseless complaint is the cause of the adviser's loss.
The adviser should have been awarded for costs, hurt, humiliation and inconvenience.
Oh, wait; that's not even possible is it? The compo only goes one way.
So glad I'm not with FSCL though.
On 11 November 2021 at 12:44 pm Amused said:
@ Dirty Harry
Well said. It's a pretty sad state of affairs for the adviser community when an EDRS scheme (FSCL) states "We found that the shortcomings in the adviser’s advice process had not caused Jane a direct loss. Jane’s failure to disclose her diabetes was the cause of her loss" BUT the adviser is still made to pay "Jane" compensation of $1,000.
The insurer has correctly not paid the claim due to her non-disclosure but now here comes FSCL and even though they acknowledge themselves the adviser is not the cause of her loss he is still made to pay "Jane" compensation. I have a real issue with this ruling as it sends completely the wrong message to customers about them failing to disclose on an insurance application.
If the actual adviser in question is reading these posts I would love to hear whether he is still a current member of FSCL? I am betting he's not.
On 11 November 2021 at 1:04 pm Dirty Harry said:
there was a review started of the DRS system. Now stalled, of course.
Check out Page 6 of FSCL's submission here:
[warning - it might make your skin crawl]
https://www.mbie.govt.nz/dmsdocument/16775-financial-services-complaints-ltd-review-of-the-approved-financial-disputes-resolution-schemes-discussion-paper-submission
On 29 December 2021 at 1:19 pm Murray Weatherston said:
I wonder how many of the commentators who thought FSCL did a bad thing in this case noticed the recent Banking Ombudsman ruling reported yesterday in the papers.
A woman scammed out of $200,000 sent by herself overseas in a number of separate transactions thought her bank should pay.
BOS said the bank did nothing wrong but then tried to apply "special inconvenience":
"However, we considered the bank should have acted more promptly to try to recover her money once notified of the fraud. The delay didn’t cause any financial loss because the funds were already beyond the bank’s reach to recover when Jennifer alerted it to the fraud. Even so, we proposed $1,000 for distress on top of the bank’s offer of $500 for inadequate communication and service.
Outcome
Jennifer did not accept our views and did not accept the offer."
On 29 December 2021 at 4:18 pm Dirty Harry said:
Well, being duped out of $230k is "distressing", and the bank did provide the facility that she used to send the money overseas.
The bank was only able to recover the last $30k she sent, so of course they bear some responsibility for the customer's losses/distress. This is perfectly in line with recent outcomes, and has become standard - the customer is ALWAYS right eh.
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Wait, so she had diabetes all along?
We could debate all day about replacing a 1 year old policy, but the reality is this client went through the application process twice.
So, she non-disclosed it twice?
So she lied twice?
So she was not 'disadvantaged' in any way shape or form by the adviser at all whatsoever.
The first insurer would not have paid out either.
Because she lied.
Twice.
It could therefore be argued that it is more likely than not, that the adviser spelt out the risk of non disclosure twice.
She should get nothing.