The conflict of interest challenge


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Why conflict-of-interest problems will continue to dog consumers

Scams aren't always clearly identifiable as such and don't always fall into a fraud box.

Sometimes they are the result of conflicts of interest that aren't declared, that you don't know about and that emerge from, for example, vertical integration of financial services. Nevertheless, this perfectly legal business plan can act as a trap and separate you from your money in a number of ways.

Under proposed changes to Future of Financial Advice reforms - flagged for introduction soon - it can start as simply as a bank teller noting that your term deposit interest rate is low and that the bank can give you a better deal: all you need to do is go and see the bank's financial planner. And it will cost you no upfront planning fee. Well, we know you don't get something for nothing. You head over to the financial planner's office on the same floor for your better term deposit deal and are told that you should really get a comprehensive plan for your finances.

This bank or mega financial group also owns or has links to an insurance company that sells death and disability insurance. Its product range also includes mortgage loans, margin loans, a whole array of fancy investment products and funds, term deposits and, of course, the big money earner these days, a financial planning section, where you now occupy a chair, having been directed there through the teller gateway.

Your presence in the planner's office gives the bank the opportunity to switch you into other products - investment funds where the bank gets a management fee, insurance products that make a profit for the insurance subsidiary of the bank or margin loans that are highly profitable for the bank but may not be a good idea for you.

Under existing FOFA rules, which came into effect last July, planners can't receive a commission from selling these products, and have to disclose their fees. They are also supposed to act in your best interests.

However, under the federal government's proposed wind-back of FOFA, the best-interest-of-client test is to be eliminated and adviser fees in the form of commissions will be allowed. And they don't have to be declared to you.

Under the proposed roll-back rules, it may be that the products recommended by the adviser to put into your super fund or investment portfolio are the best in the market for you. But they may not be in your best interests and, without the application of a best-interest test and with commissions to be earned from selling them, it may well be that the products pushed are better for the planner than for you. You may never know.

Here is one trap. If the adviser also suggests you change your insurance policy for death and disability, this can be particularly risky. If you switch super funds, it mostly means you change insurers. Such insurance policies tend to be complex with exclusions and requiring prior health condition declarations. You may have a $500,000 policy with insurance company AB, and have been with them since you were 20, when you were perfectly healthy. You are covered in the event of death or disability occurring even if your health has deteriorated since then. This is not true of a new policy.

Let's say your alcohol consumption has crept up over the past 20 years under the stress of work and dealing with work-life balance, your liver is not in as great a state as it was, and you've developed a couple of other conditions that have given you a couple of frights.

The adviser might suggest you switch to XY Insurance, which happens to be a subsidiary of the bank and which will earn the planner a commission. You may be told the annual cost is the same but has better features - and may not be told that the new policy requires a new health declaration where you are required to fess up to that extra alcohol intake and your less than happy liver or any other condition you have developed.

You develop a disability, or worse, you die a few years later from these conditions, and XY Insurance refuses to pay out because it says you didn't come clean about the true state of your health when you took out the new policy.

Had you stayed with the old policy, this wouldn't have been possible. AB Insurance would have taken on the risk at 20 and conditions remained the same. XY Insurance says its conditions are different and should have been fully explained to you at the time of application. The fact that this didn't happen is not its responsibility, but the adviser's. The adviser says they did explain this to you. It's your word against theirs.

So if it is disability cover involved, you have a fight on your hands. If it is a death benefit not paid out, your family has a battle on its hands. The adviser is unlikely to be of help. The adviser may have moved on, or will say it was your responsibility to fess up to health problems and it wasn't their job to interrogate you about your health. The insurer is likely to say that a declaration being required about bad health is clear in the policy and you should have read it before agreeing to it.

This dispute can be taken to the financial ombudsman, who may or may not see it your way. Recently a dispute like this ended up in the Court of Appeal. The policy was switched before FOFA. The insurer refused to pay out on the basis of non-disclosure of a health condition. The policyholder's spouse challenged it in court and won. The insurer appealed the decision. That meant more legal costs, delay and stress. The Court of Appeal agreed with the trial judge who had found against the insurer, so all was good in the end.

But it took months of court hearings. Because court decisions are unpredictable, the decision in favour of the wife could have been overturned on appeal, she would have lost and would have had to pay the insurer's legal costs as well as her own.

The best way to avoid this sort of trap is to avoid switching life and disability insurance policies even if you are told there is a much better deal. You might save a few dollars only to find later that your claim is refused on a technicality. Ask what is in it for the planner. If your insurance cover is inadequate, see if you can increase your existing cover with AB Insurance, or take out a new policy and read the conditions carefully to see that you comply with the medical declarations required. Don't rely on an adviser with a conflict of interest.

DO: Avoid switching life and disability insurance policies.

DON'T: Rely on an adviser with a conflict of interest.

DO: Realise the best interest-of-client test is likely to be eliminated.

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