All financial advisers must exercise the care, diligence and skill that a reasonable financial adviser would exercise in the same circumstances. In determining what a reasonable financial adviser would do, the following matters must be taken into account:
See more in section 33 of the Financial Advisers Act 2008. See examples below of how these obligations apply to advice on insurance and credit products.
These examples show how we consider these obligations apply to:
In general, when providing advice, advisers must:
In addition advisers should keep records demonstrating how they have fulfilled the care, diligence and skill requirement in providing advice, and how they have disclosed and managed any conflicts of interest arising from commissions or their remuneration. AFAs also have specific conduct and record-keeping requirements under the Code of Professional Conduct.
The information below show how these general principles apply in insurance and product replacement advice. The examples are not intended to be exhaustive comments on compliance with the 'care, diligence and skill' obligation.
Insurance advice must be balanced - providing a clear explanation of both the benefits and the exclusions or limitations of the product's cover.
For personalised advice, consider the eligibility of the client for the product and the suitability of the product for that client.
For example, FMA expects an adviser to identify the key exclusions and limitations relevant to the client and to highlight these. An adviser may not be able to address all exclusions or limitations in a policy, but should at least consider the client's needs, unusual features of the product and any information on common reasons for claims rejections.
If providing insurance advice in conjunction with another product, advisers providing personalised advice should establish whether the client needs the insurance. For example, for payment protection insurance on a loan, this will be more than the fact a client has a loan.
If the payment protection premium is to be added to the loan, as a minimum, the total cost of adding the protection insurance to the loan must be taken into account and explained to the client.
When advising a client to replace an existing product with a new one, an adviser should consider whether s/he is giving (or the client might reasonably expect the adviser is giving) an opinion on the disposal of an existing product, as well as the purchase of a new product.
For personalised advice, the adviser should:
For AFAs, these points will assist with compliance with the Code requirements, including those relating to suitability and limitations on the service (Code standards 8 and 10).
If recommending replacement of an insurance policy, the comparison should include:
The adverse consequences might include:
If no comparison is made, the general types of adverse consequences above should be considered in explaining the limited scope of the service.
In considering whether suitable advice has been given, we will consider the frequency with which an adviser recommends that a customer replace a product. For example, we might expect that one year policy will only be renewed or replaced annually, unless there is a significant change in the client's relevant circumstances.
In deciding whether to recommend a product change, advisers should compare the total cost of the credit as well as the repayment instalment amount and should draw both to the client's attention.
Other elements of the comparison should include:
Adverse consequences might include:
If no comparison is made, the general types of adverse consequences above should be considered in explaining the limited scope of the service. For example, "replacing a shorter loan with a longer loan lowers the repayment instalments, but as it takes longer to repay the loan, it will cost more in total".