With ASIC's Peter Kell pointing to a level of life insurance policy churning to warrant regulatory concern, it is time for a clear definition of 'churn'.
With the Australian Securities and Investments Commission (ASIC) commissioner, Peter Kell, last week pointing to the existence of sufficient life policy churning to warrant regulatory concern, it is high time that both the industry and regulator provided a clear definition of “churn”.
If one thing has become abundantly clear this year, it is that there exists no solid agreement between the major stakeholders about the ingredients which can be commonly accepted as constituting churn.
This much was made obvious at a recent Money Management/Association of Financial Advisers (AFA) forum dealing with the Financial Services Council’s (FSC’s) proposed “framework” around life/risk remuneration, and at a later Money Management roundtable dealing with the same question.
What became very clear during those debates is that substantial disagreement exists about the levels of “churn”, and a major reason for that disagreement is that there exists no agreed criteria for how such practices should be defined.
Even some of the senior life company executives attending the roundtable acknowledged that it was all too easy to mistake the statistical data generated by totally legitimate practices for “churn”, with Asteron Life executive general manager, adviser distribution Jordan Hawke pointing out that care needs to be taken in analysing lapse data.
Hawke and CommInsure’s Tim Browne both pointed out that some advisers might present with higher than normal lapse rates, but this ought not of itself to be interpreted as an indicator of “churn”.
So while it is understood that the FSC, the AFA and the Financial Planning Association may be close to reaching some form of agreement and accommodation around the FSC’s proposed “framework” – and in particular the proposed “claw-back” provisions – it would seem imperative that all the stakeholders also reach agreement on what really constitutes “churn”.
For his part, Kell pointed to recent ASIC surveillance which had identified several financial advisory practices and events where consumers had come out behind in “some quite significant ways”.
He said these included clients ending up with less cover, or more expensive cover where there had been no improvement in the offering, and instances where some claims had ultimately been denied “in ways that can frankly be traced back to an inappropriate switch”.
We must presume that Kell has shared the results of ASIC’s surveillance with the other industry stakeholders, and that the regulator can, as a result, provide guidance and case studies on what it believes constitutes churn and how it might thereafter generally be avoided.
ASIC can, in fact, go some way towards providing that guidance via its regulatory approach to the best interests duty contained within the Future of Financial Advice legislation, but this does not obviate the need for the industry to develop an agreed set of criteria with respect to what actually constitutes “churning”.
