Authorised Financial Adviser’s obligations to advise clients of disclosure obligations
The Financial Advisers Disciplinary Committee (Committee) has released a decision on complaints against an Authorised Financial Adviser (AFA) regarding his duties under Code Standard (CS) 8 of the Code of Professional Conduct for AFAs (Code).
This decision emphasises that AFAs must take care to:
- ensure their clients understand their obligation to make full disclosure
- to insurers;
- make full inquiries of their client’s situation prior to arranging insurance coverage; and
- clearly communicate any limits on the advice provided.
Mr T was an AFA who specialised in advising members of the building and construction industry on income replacement, health, trauma and life insurance cover. Complaints were made by two former clients, Mr P and Mr W, in relation to advice he had given them, and was focussed on the extent to which Mr T had inquired about their medical history.
The complaints engaged CS 8 of the Code, that provides:
“When providing a personalised service to a retail client an AFA must take reasonable steps to ensure that the personalized service is suited for the client.”
The Committee noted that the overarching principle of the Code requires AFAs to apply the Code Standards “in a way that encourages public confidence in the professionalism and integrity of financial advisers”.
In light of that, the Committee said that CS 8 requires an AFA to make:
- reasonable inquiries to ensure the AFA has an up-to-date understanding of the client’s financial situation, financial goals and risk profile, having regard to the nature of the personalised service being provided; and
- where a client declines to provide some or all of the information required under CS 8, an AFA must take reasonable steps to ensure the client is aware that the personalised service is limited and specify those limitations.
Mr W’s complaint
Mr W was a project manager for a company, and met with Mr T at his company’s offices to discuss his life, income protection and mortgage protection insurance.
Mr W had been insured by Sovereign Assurance under a policy which contained an exclusion for “disease, disorder of or injury to the lumbar Sacral Spine, its Intervertebral Discs, Nerve Roots or Supporting Musculature” (lumbar exclusion). Mr W was looking to replace the Sovereign Policy with a policy with PartnersLife.
Mr W told Mr T that the lumbar exclusion was required because he had a slight back ache from putting up a curtain rail which he had disclosed to Sovereign. Mr W insisted that he would not allow the application
for insurance to PartnersLife to include any mention of his back problem because, to do so, would be a ‘misstatement’ by him. Mr T took him at his word and made the application to PartnersLife.
Unbeknownst to Mr T, Mr W actually had an extensive medical history which he had not disclosed to Sovereign or PartnersLife. This medical history came to light when Mr W suffered an injury that required medical attention. At this point, PartnersLife withdrew all cover for Mr W.
Application of CS 8 to Mr W
The Committee held that Mr T knew that Mr W’s Sovereign policy was subject to a lumbar exclusion, and this was information he was obliged to take into account when assessing the suitability of the PartnersLife policy he was recommending to Mr W. Mr T chose not to act on information he knew. Rather, he took Mr W at his word.
Although Mr T was not required to be ‘on notice’ that Mr W might be withholding other information, given his knowledge of the lumbar exclusion, he should have made further inquiries before concluding that the PartnersLife policy was suitable for Mr W. Suitability in this context means “the best outcome taking account of the full circumstances of the client, determined after reasonable inquiry”. The Committee commented that Mr T had allowed himself to be “suborned by Mr W’s strong assertions when he should have tested the matter further”.
The Committee also said that when Mr W refused to allow his application to PartnersLife to proceed, Mr T should have taken reasonable steps to ensure that Mr W was aware that Mr T’s service was therefore limited and to specify those limitations.
Mr P’s complaint
Mr T met with Mr P on three occasions. At the first meeting Mr T sought to complete his ‘fact find’ on Mr P; at the second meeting Mr T presented his statement of advice; and at the third meeting an application to PartnersLife was completed. During these meetings there was some discussion of Mr P’s medical history, however Mr P did not raise a previous ankle injury because “it did not seem to be that big an issue”. It was unclear whether Mr P formed this view because of positive advice received from Mr T or whether Mr P decided it was not significant enough to be included because of what Mr T had advised about expected disclosure.
Insurance was then placed for Mr P, without disclosing Mr P’s past medical conditions.
Application of CS 8 to Mr P
The Committee held that Mr P did not make any medical disclosures because Mr T failed to elicit those disclosures. This was either because Mr T did not ask about them directly or because he did not make the importance of full disclosure clear enough to Mr P. Knowledge of those matters was a necessary requirement to obtain an up-to-date risk profile. Therefore, it was irrelevant that a subsequent insurer had chosen not to limit Mr P’s cover just as PartnersLife had not (and that arguably the risk profile presented by Mr P was the same with or without the disclosures).
The real issue was whether Mr T made reasonable enquiries about Mr P’s risk profile at the time the application to PartnersLife was made. Mr T had not even requested that Mr P complete a list of prior medical issues. Therefore a breach of CS 8 was made.
This decision emphasises the importance of an AFA making reasonable inquiries of their client’s risk profile. In some cases, all this may involve is the completion of a list of prior medical issues and explaining the importance of full disclosure.
Further, if a client refuses to make full disclosure to an insurer, an AFA must ensure that they are aware of the limits this will place on the AFA’s service.
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