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Unravelled: Broadening approved product lists – would it really achieve anything?

5 August 2015

Written by Senior Regulatory Counsel Michael Mathieson

In his report earlier this year on retail life insurance advice John Trowbridge recommended that every advice licensee include at least half of the 13 relevant life insurers on its approved product list. The Assistant Treasurer has since indicated the Government may 'consider measures to widen APLs by 1 July 2016'.

I doubt that regulating APLs would achieve anything worthwhile. In this article I explain why.

There seem to be two broad policy objectives behind this proposal. The first is to improve the quality of retail life insurance advice. The second is to improve competition between life insurers.

Quality of advice

The notion that APLs may be relevant to the quality of financial advice is not new. FoFA nerds will remember that, back in 2011, APLs were specifically addressed in the exposure draft materials for the proposed new duties for financial advisers.

FoFA

The exposure draft Bill provided that, if the adviser was subject to an APL and it was reasonably apparent that there was no product on the list that 'would achieve the objectives and meet the needs of the client', two consequences would follow. One, the adviser would not be required to consider products that were not on the list. Two, the adviser could not recommend a product that was on the list.

Further, the exposure draft EM included this statement:

… the narrower that the licensee constructs an approved product list, the more likely it is that its [advisers] will not be able to recommend a product from that list. This means that it is in the interests of the licensee to construct approved product lists that are suited to their target client.

 

This APL-specific content was subsequently removed from the Bill and EM. More recently, ASIC's guidance suggests it is not troubled by narrow APLs. It is worth describing what, specifically, ASIC said.

ASIC put together an example where the financial adviser was subject to an APL which was limited to a single relevant financial product – a transition to retirement pension issued from a related party superannuation fund. In the example, in response to a telephone enquiry the adviser recommends the TTR pension to the caller. The adviser recommends the TTR pension even though its fees are merely 'reasonable' (relative to the market average) and even though the fund's long-term investment performance has it ranked 14th out of 20 peer funds.

According to ASIC, this advice was provided consistently with the adviser's duties under sections 961B (best interests), 961G (appropriate advice) and 961J (priority in the event of a conflict) of the Corporations Act. If ASIC is right, then it follows that the narrowness of an APL has nothing to do with an adviser's FoFA duties or, it seems, with the quality of the advice they give. 

Insurance products

Turning to retail life insurance products and Mr Trowbridge's recommendation, the link between an APL (on the one hand) and the quality of any financial advice provided (on the other hand) is not clear to me. The adviser is subject to the FoFA duties. If the adviser gives poor quality advice they may well breach one or more of those duties. The content of retail life insurance advice may be affected by commissions, but there are separate recommendations concerning commissions. Would regulating the APL really make the advice that's given any better?

It is difficult to see how it could. Assume that an advice licensee's APL is expanded in the way Mr Trowbridge recommended. One adviser might recommend, say, 10 different insurers (say, roughly 10% of the time each) and give really bad quality advice in the process – especially if they were making those recommendations under an informal quota system. Another adviser might recommend just the 1 insurer all of the time and give really good advice in the process. This might be so if the insurer's policy terms and pricing were market standard but the insurer performed above and beyond in the servicing department. The insurer might do so precisely because the advice licensee is a related party.

Competition between life insurers

The objective of promoting competition between life insurers (for the benefit of consumers) looms large in Mr Trowbridge's report. The idea of regulating APLs as a means of improving competition is intriguing.

FSI followers will remember that David Murray's interim report asked whether vertical integration was a problem in the wealth management sector. They will also remember that his final report was silent on the issue. We can only speculate as to why this was the outcome.

If you were minded to 'do something' about vertical integration, regulating APLs in relation to retail life insurance products would seem a rather indirect and unlikely tool for achieving your purpose. Having 7 different insurers' products on an APL would count for nothing if, in practice, the advisers in question consistently recommended just the 1 insurer's products. As before, they might feel duty-bound to do so if that insurer's products have market standard terms and pricing but the insurer's servicing is superior.

And then there is the elephant in the room. An awful lot of retail life insurance is taken out through superannuation. A superannuation product will normally have pre-selected insurance cover embedded or available within it. Broadening APLs in relation to retail life insurance products will count for little if, as seems to be proposed, the measure is limited to insurance acquired outside super. (How it could apply to insurance through superannuation is difficult to envisage.)

Finally, narrow APLs may not be as nefarious as Mr Trowbridge implies. Some advice licensees allow advisers to go 'off APL' with the licensee's permission and some of those licensees will grant permission in the ordinary course. In these cases, it seems unlikely that the APL could have a significant detrimental impact on competition.

Conclusion

I think you can be hotly in favour of improving the quality of financial advice and the level of competition between life insurers and yet opposed to requiring APLs to be broadened. The initiative is likely to be costly and yet unlikely to advance either of the policy objectives referred to.

Other articles in this edition of Unravelled

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