Questions of Conduct: when does good conduct become financial advice?

Conduct questions are topical right now for financial services. There are lots of articles being penned about how, based on an Australian Bank’s advice on Australian Superannuation, there are probably the same conduct problems in New Zealand. Well, maybe, but in a functioning market there are always some examples of bad conduct. How widespread are they? What do they look like?

So, we need some practical, and frankly, New Zealand, examples to work with. I shall offer a couple of examples of how poor conduct can cause customer harm.

Replacement business is a prime area of concern, which is why it has been one of the limited number of areas of the life insurance sector to be examined by the FMA. As ever, it is a balancing act. MBIE likes to see a certain level of replacement business activity, because it shows a functioning market. On the other hand, inappropriate replacement, which causes harm to the consumer, is something we want to prevent, or at least, minimise. Harm can be caused when a consumer switches and loses some cover or features that they had, or perhaps if they have to accept reduced coverage due to a change in health – without realising that they have done so.

A change where the consumer is completely informed and happy – even with a downgrade – has probably caused no harm. After all, people downsize their cars and homes to save money from time-to-time as well. The tricky bit is knowing whether the advice was good and the consumer knew what they were doing. Which is why we tend to focus on the procedural aspects of advice giving, and record-keeping. The FMA has done some recent work on this, analysing five years of policy data to hunt down cases where replacement business may have caused harm. They have published their results, and, while not reassuring on a wider basis (because you cannot extrapolate from a group specifically chosen because of indications of riskier behaviour) they didn’t find many examples where the advice process could be faulted under the current law. That might be one reason why the focus has moved on to other concerns.