ASIC must deliver answers on churn

ASIC must do more than simply identify problems when it publishes its forthcoming report on the life/risk industry. It must identify some solutions.

When Australian Securities and Investments Commission (ASIC) deputy chairman, Peter Kell earlier this month told the Financial Services Council (FSC) conference that the life/risk industry had not moved far enough fast enough, he was paving the way for the delivery of some hard news by the regulator.

That hard news will come in the form of a report to be published by ASIC within weeks, the contents of which are based on the regulator’s probing of the major insurers to identify the highest instances of product switching and its consequent closer examination of particular advisers and their licensees.

Given that the regulator was clearly focused on identifying areas where instances of product switching were higher than the norm, it follows that its forthcoming report represents a continuation of the crack-down on so-called “churn” which began more than two years’ ago and was prompted in large part by concerns expressed by the former Minister for Financial Services and now leader of the Opposition, Bill Shorten.

It is now history that a letter written by Shorten prompted the FSC to develop a so-called anti-churn framework, including a claw-back provision which created deep divisions in the industry and which was ultimately abandoned early last year.

When the framework was abandoned, FSC chief executive, John Brogden acknowledged that his organisation had failed to gain industry agreement on the issue, but in what represented an ominous footnote to the announcement, ASIC’s Kell used a Money Management breakfast to make clear that churn remained a matter of concern for the regulator.

Many had believed that with a change of Government in September last year the regulator might lose interest in the churn issue, but the work it has undertaken throughout 2014 and its forthcoming report suggests ASIC is determined to ensure the industry addresses what it sees as a major problem.

However if ASIC wishes to properly address the issues it perceives in the life/risk industry then it must do more than simply point to higher than normal lapse rates or product switching. It must instead seek to provide some solutions and guidance.

A starting point for ASIC in seeking to assist the industry would be to lay down some basic ground rules around what actually constitutes a genuine “lapse” and a “churn”. In doing so, it should also ensure that it takes account of the manner in which product design and client best interest requirements impact the recommendations made by advisers.

By initiating its latest research within the product manufacturers and assuming those insurers fully disclosed the relevant information, it seems probable that ASIC has developed a fairly accurate picture of how and where lapses and product switches occur and what represents the industry norm. This represents a solid starting point.

The next step for the regulator is clearly the publication of its report and this should then be followed by industry consultation aimed at the development of some viable guidance.