FSC provides guidance on DDO – Significant dealings for Life Insurance

AFA News 17 March 2022. The AFA has been in discussions with the FSC for some time about the Design and Distribution Obligations and how they apply to financial advisers.  Significant Dealings has been one of the areas where greater clarity was required.

We are aware that there is a level of confusion around DDO and what actions this requires an adviser to undertake.  There is no question that some of the elements of DDO are very complex and the regulatory guidance is lacking in specificity.

We have recently sought better guidance for understanding what a significant dealing is in the life insurance context, where we did not anticipate that there would be much conduct that was outside the Target Market Determinations.  In response, the FSC has provided the following guidance:

The FSC’s guidance on significant dealing for life insurance distributors refers to, “25% of the distributor’s total retail product distribution conduct in relation to the product over the reporting period”.

AFA Question: is product distribution assessed at the PDS level or the individual product level (death, TPD, Trauma and IP)?

Based on the FSC’s understanding and intention of the Design and Distribution Obligations (DDO) they believe that ‘product’ refers to the individual cover types offered within a PDS. E.g. Life Cover, TPD Cover, Trauma Cover, Income Protection Cover. This is regardless of whether the cover is issued on a standalone basis or as bundled cover e.g. Life Cover by itself (this counts as 1) or Life Cover with linked TPD Cover (this counts as 2).

Note: The terms ‘cover’ and ‘product’ are often used interchangeably in our industry, so to use the words put forward in the question, “product is assessed at the individual product level (death, TPD, Trauma and IP)”.

This can be illustrated with an example.

During a reporting period an adviser has recommended the following cover/products from the same PDS:

  • 5 Income Protection Cover (1 client was outside the TMD)
  • 1 Trauma Cover (1 client was outside the TMD)
  • 2 Death Cover
  • 2 TPD Cover linked to Death Cover (1 client was outside the TMD).

At the end of the reporting period, the adviser needs to review their dealings with each product issuer they have dealt with for that period. In this example, the adviser has recommended a total of 10 cover/products over the reporting period and there have been three cases where the product has been recommended to a client(s) outside the TMD.  Note: It could be three different clients or the same client for three cover types.  Therefore, 30% of the adviser’s distribution of product over the period with this product issuer is outside the TMD and a significant dealing has been triggered. The adviser must report this to the product issuer within 10 days of being made aware that a significant dealing has occurred.

AFA Question:  should products be measured in terms of premiums, amount of cover or just number of policies?

The FSC believes that it should be measured in terms of the number of individual products, and believe that the other measures mentioned may not work as an accurate measure of what constitutes ‘product’ for the following reasons:

  • ‘Number of policies’ isn’t an accurate measure because some insurers allow multiple cover types/products on one policy. E.g Life Cover and Income Protection Cover. In addition, the client may be inside the TMD for Life Cover but outside for Income Protection Cover.
  • ‘Premiums’ can vary considerably between similar cover types/products based on optional benefits and features and if loadings have been applied. For example, Income Protection with a 90 day waiting period is cheaper than a 30 day waiting period, but both recommendations could be outside the TMD. Premium as a measure also aggregates the business and DDO is about ensuring products are distributed in accordance with the TMD each time. Besides this, a few unusually large premium cases for an adviser could easily distort the view of the actual business being recommended/written.
  • If ‘amount of cover’ refers to the sum insured, we don’t feel that this is the correct measure, for the same reasons mentioned above about ‘premiums’.

We will continue to engage with the FSC on these DDO matters, however, it is our view that advice on a life insurance policy is not likely to be in breach of a TMD, unless there are particular circumstances, such as the client is not eligible to claim on the policy.  Such a situation would also suggest that the advice did not comply with the Best Interests Duty.

For any questions on the DDO requirements, please email policy@afa.asn.au

Issued 17.03.2022. AFA Policy & Education Update