The Registrar has proposed amendments to the FAIS General Code of Conduct (GCoC) and the Specific Code of Conduct for Authorised Financial Services Providers and Representatives conducting Short-term Deposits Business. This article focuses on new definitions proposed for ‘replacement’ and ‘variation’ of financial products, as well as comparison.
‘Replacement’ means substituting one product with another, or terminating or varying a product while taking out another. From the proposed definition, it is not limited to long term insurance policies; it extends to all financial products. To be deemed a replacement, the substitution, termination or variation must meet the same or similar needs or objectives of the client.
The definition also sets out which types of financial product transactions constitute replacements. Until now, neither the FAIS Act nor the GCoC defined which types of transactions or product changes constitute a replacement. For long term insurance policies, replacements are dealt with on a self-regulated basis through an ASISA code.
The term `variation’ clarifies the type of variations that constitute a replacement. By defining ‘variation’, the Registrar has listed actions that could be acknowledged as the replacement of a financial product. These are:
- Accelerating the contractual retirement date or other date on which benefits become available, for example early maturing of a retirement annuity;
- Reducing premiums or periodic investment amounts payable;
- Making a product paid-up;
- Reducing or removing any guarantee or benefit;
- A transfer from one product to another;
- Not renewing a short-term insurance policy.
By defining the transactions that constitute a replacement, the Registrar has both broadened the types of transactions that fall within the definition of replacements and clarified which transactions apply. The Regulator is therefore likely to look to advisors to apply the provisions in the GCoC that relate to replacements.
The proposed GCoC amendments also include another new term, ‘comparative’. This is a comparison between providers, products, services or related services of one or more providers or product suppliers.
When you make a recommendation to a client to change from his or her current financial product, you will need to meet the requirements set out in the legislation regarding comparison. When you complete a comparison form, consider whether the client understands the information provided.
Going further, the proposals state that providers may not make a product comparison unless the differing characteristics of each product are clarified. Providers may also not make inaccurate, unsubstantiated comments when relating to the use of comparison in advertisements.
What to do when replacing a product
Currently the GCoC lists the information you should disclose to a client “where the financial product (‘the replacement product’) is to replace an existing financial product wholly or partially (‘the terminated product’) held by the client”. It requires that you take reasonable steps to ensure a client receives suitable advice. The replacement product should better suit the client’s objectives and be in his or her interests. All the information given should be clear and in plain language. The record of advice must be transparent for the client and easy to understand.
We therefore encourage you to spend time on your record of advice, as you may need to state why you replaced a client’s product. You will need to prove you obtained the required information from the client to determine his or her needs and objectives to recommend the most suitable product for his or her specific circumstances. You will also need to keep documented evidence of the information given, which aspects of the products were compared, and the advice provided to the client. Comparisons given to the client need to show the advice was fair and in his or her best interest.
Purpose of the amendments
Looking at RDR Proposal QQ: Conflicted remuneration on RA transfers, the proposed definition of replacements addresses the FSB’s concerns. This is because the transfer of retirement annuities and living annuities from one provider to another constitutes a replacement and is therefore subject to all relevant replacement disclosure and comparison obligations.
Masthead has submitted commentary to the FSB on the proposed amendments to the GCoC and the Specific Code of Conduct for FSPs and Representatives conducting Short-term Deposits Business.