The replacement of products has always been a contentious issue.
The FSCA have always looked at replacements with concern, wondering if the client’s best interests were the main reason or whether it was the broker’s need to earn new commission which caused the replacement.
Treating Customers Fairly
With Treating Customers Fairly, the FSCA have put replacements into the spotlight and have introduced new requirements from the 1 September 2019. A new replacement advice record has been introduced by the FSCA, taking over from the form drafted by ASISA. The new form is designed to take into account the fairness outcomes of Treating Customers Fairly.
When doing a replacement, you need to ensure that you can show the following:
- Have you provided the client with enough information to make an informed decision regarding the replacement?
- Have you considered all necessary information and the client’s circumstances when advising on the replacement?
- Have you provided accurate and detailed information to ensure you create the correct expectation of what the benefits are and how the product works?
The new Replacement Advice Record has been drafted to provide the replacing product supplier with sufficient information to determine whether the replacement is in the best interests of the client.
What is the responsibility of replacing product supplier?
From the 1 September, the replacing product supplier will be required to have a replacement team to:
- check the replacement and ensure that you took reasonable steps to satisfy yourself that the replacement policy is more suitable to the policyholders needs than amending their existing policy; and
- send it to the replaced product supplier within 14 days to allow them an opportunity to challenge the replacement based on the information provided on the form.
What has changed on the new form?
The difference between the existing ASISA RPAR and the new FSCA RAR is that all information will now be contained in one form. You will no longer be expected to do a separate comparison sheet.
In addition to the usual client information and policy name and number, on the new RAR, you will complete the following information:
- Reasons for recommending the new product
- Reasons why you could not/did not amend the existing policy to meet the client’s needs
- A breakdown of the differences between the new and the replaced policies.
This is broken down into the various benefits – death, lump sum benefits, income protection, accident benefits, severe illness/critical illness/dread disease, savings or investment benefits, general policy features such as premiums and charges, exclusions, tax treatment and even loyalty or add on benefits
- Financial Adviser remuneration
This is a breakdown of upfront commission, ongoing commission and any other direct or indirect remuneration or other financial interest. If you are replacing a policy which you wrote and earned the original commission on, you have to detail the original commission which you earned in rand terms over the past 5 years.
The client will then have to confirm that you have explained the differences between the two policies and will have to sign again to confirm that they are aware of the commission that you are earning.
The final part of the RAR is the declarations section – one section for the advisor and one for the policyholder.
As the advisor, you have to sign a declaration stating that you have explained the implications of the replacement to the client in sufficient detail and in an appropriate manner, taking into account the client’s level of knowledge so that the client was able to make an informed decision.
Further, you have to declare that either the client has elected to proceed with the replacement despite your advice that it might not be in their best interests, or you believe that the replacement is in their best interests.
The client, as the policyholder has to sign a declaration stating that the information in the RAR was explained to them in a way they could understand, they have carefully considered the information and have decided to proceed with the replacement – either against your advice or in agreement with your advice that it is in their best interests.
The information required in the form is quite onerous and the declarations you are expected to sign are also quite onerous.
The FSCA are making you sign to confirm you have done the job correctly and in the best interests of the client.
This document will form part of your record of advice going forward as it will contain most of the information you discussed with your client and so you need to ensure that you have completed it as fully and as accurately as possible.