Moonstone: Policy Replacement Requirements
A reader sent me a copy of a new Replacement Policy Advice Record (RPAR) issued by ASISA for use where life and/or investment products are replaced. This document was published in December. If you have not seen it yet, please download a copy here and keep
The General Code of Conduct lists the following requirements, which have to be complied with where one financial product replaces another. It does not distinguish between different sectors of the industry:
“The Code provides that… the provider must fully disclose to the client the actual and potential financial implications, costs and consequences of such a replacement, including where applicable, full details of:
- Fees and charges in respect of the replacement product compared to those in respect of the terminated product
- Special terms and conditions
- The impact of age and health changes on the premium
- Differences between tax implications of the replacement product and the terminated product
- Material differences between the investment risk of the replacement product and the terminated product
- Penalties or unrecovered expenses deductible or payable due to termination
- To what extent is the replacement product readily realisable or the relevant funds accessible, compared to the terminated product
- Vested rights, minimum guaranteed benefits or other guarantees or benefits which will be lost as a result of the replacement
- Any incentive, remuneration, consideration, commission fee or brokerages received by the provider in respect of the terminated and/or replacement products.”
The ASISA RPAR document does not cover the detail indicated above. There is however, one paragraph which calls for a declaration by the intermediary:
“I have fully discharged my duties as set out in section 8 (d) of the General Code of Conduct for Authorised Financial Services Providers and their Representatives (the Code) and have retained a record of such advice as required by section 3 of the said Code.”
Some will view this is as more of an attempt to protect the product houses than the intermediary. At the same time, it acts as a useful reminder to comply with the requirements set out above. A closer alignment between the two requirements could have killed two birds with one stone.
A number of readers feel that many product houses afford very little value to this document. It attracts the same close attention as the register you complete when entering a building with restricted entry. You can write on there what you like - nobody looks at it again. Most view it as just another addition to an already burgeoning administrative burden.
While RPAR document relates to the life offices, and investment business, those in other sectors of the economy question the application of the 9 elements listed above. If one looks at the practical implications in the short-term and healthcare environment, not many are directly applicable, yet, you are legally obliged to go through the motions, despite the fact that the requirement is patently aimed at investment and life risk business.
At the heart of the document lies the perennial problem of replacements.
Many advisors replace existing policies with new ones, in the interest of clients, yet we all know that there are also many who do so for commission considerations only. This is an extremely difficult business practice to monitor, exacerbated by product providers who openly encourage the practice.
As pointed out before: the elimination of unwarranted replacements will only be addressed adequately when there is a change of heart at boardroom level.
Of, soos ons in Afrikaans sê: As jy ‘n hond wil slaan, sal jy altyd ‘n stok kry.
