THE practice of churning, which has given financial advisers a bad name in the past, is likely to be curbed through regulation.
The Financial Services Board’s Retail Distribution Review (RDR), which will change the ways in which financial products are sold to you, as well as the amended Policyholder Protection Rules (PPRs) under the Long Term Insurance Act (LTIA), will probably include measures to discourage churning.
Churning, according to the RDR, is the “inappropriate or unnecessary replacement of policies, driven by intermediary incentives”. In other words, it’s when an adviser advises you to change products unnecessarily, to earn commission on the new product.
Alan Holton of Compliance Monitoring Systems, in a recent article for Moonstone Compliance, says the RDR contains concerns about the negative effects of churning, including when intermediaries change employers (the life assurance companies).
Sign-on bonuses have been outlawed, but an intermediary may still “churn” you into a product provided by his or her new employer.
Holton says that, after industry input, the December 2016 RDR Status Update advised that a prohibition on commission – or any other change in the commission model for replacements – will be deferred until the overall final remuneration model for life risk policies is settled. As an interim measure, the method considered most effective for the prevention of churning is to impose replacement monitoring obligations on the insurers concerned.
Holton also refers to the second draft of the amended PPRs, released for comment on September 1 (which had to be submitted by October 2).
The new PPR 19 provides that insurers must obtain confirmation from intermediaries whether a policy to be entered into constitutes a replacement policy. If it does, the insurer must obtain a copy of the record of advice that the intermediary is required to give you in accordance with the code of conduct under the Financial Advisory and Intermediary Services (FAIS) Act, unless the intermediary confirms that he or she did not provide advice. Then, the receiving insurer must provide the insurer of the replaced policy with a copy of the advice record.
In addition, the insurer must confirm that the replacement advice record complied with the FAIS code of conduct and contained information indicating that the intermediary took reasonable steps to satisfy himself or herself that the replacement policy was more suitable to your needs than retaining or modifying the replaced policy.
Holton says this provision must be read together with the proposed new LTIA Regulation 3.9A, which states that an insurer may not pay any commission in respect of a replacement risk policy unless and until the confirmation referred to in PPR 19 has been provided.