When ‘churn’ turns to lapses and the quality of advice
The Australian Securities and Investments Commission (ASIC) has reinforced the fact that it no longer wants to talk about “churn” and is now more interested in “lapses” and the appropriateness of associated life/risk advice.
The regulator’s attitude was confirmed during its recent appearance before the House of Representatives Corporations and Financial Services Committee where senior ASIC executives, including the deputy chairman, Peter Kell, responded to a question specifically referencing “churn” by choosing to answer in terms of “lapse rates”.
ASIC executive, Louisa Macaulay acknowledged that the regulator was having a look at the life/risk sector ahead of the new legislation being put in place, noting “We understand that a policy can lapse for very many reasons”.
“From our surveillances that have been conducted over the years, including Report 413, we know that there are, in some parts of the industry, some practices where advice around changes in life insurance policies being given are not in the best interests of the client,” she said. “That's what we're after.”
“So the question is: how do we isolate those instances and address them? Lapsed data is one very preliminary piece of data that we use in relation to that. We have got that data from insurance companies. We take that data and we have a look at it and then we add to it other data we have internally,” Macaulay said.
Asked by Queensland Liberal National Party backbencher, Bert van Mannen whether the lapsed data identified particular advisors who had significantly higher lapse rates, Macaulay said this was the case while Kell said it clearly represented a “flag”
“It's clearly a flag. You need to then go behind that and say, 'Why has this occurred? Is it the case that we've got a whole lot of inappropriate switching going on here, or is there another reason?',” he said.
Kell said it was likely there would be some action resulting from the work being undertaken by ASIC but it was too early to say what that would look like.
However, he reinforced Macaulay’s comments that a lapse of itself was not a breach.
“When you look behind it, it's whether the advice was inappropriate, not in the best interests of the client and whatnot that is the actual issue that we need to confront,” Kell said.
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