BY EMAIL ONLY Members Undertaking No. 20 18 August 2014 To: Ordinary and Associate Members MU 20/14 - LIA MINIMUM STANDARD FOR LIFE INSURANCE ADVISORY PROCESS (EFFECTIVE DATE: NO LATER THAN 1 APR 2015) ACTION: 1. THIS MEMBERS UNDERTAKING REPLACES MU 20/12 DATED 20 NOV 2012. 2. FOR ORDINARY MEMBERS COMPLIANCE (IN RESPECT OF THEIR RESPONSIBILITIES AS EXEMPT FA UNDER THE FINANCIAL ADVISERS ACT, WHERE APPLICABLE) WITH EFFECT FROM 1 JAN 2015 AND NO LATER THAN 1 APR 2015. 3. FOR ASSOCIATE MEMBERS INFORMATION. Three files belonging to this Members Undertaking are: 1. MU 2014.docx 2. MU 2014 Appendix A.docx 3. MU 2014 Appendix B.docx LIA SECRETARIAT
LIA MINIMUM STANDARD FOR LIFE INSURANCE ADVISORY PROCESS Members Undertaking No. 20 18 August 2014 1. OBJECTIVE 1. FAA-N16 (Notice on Recommendations on Investment Products) requires financial advisers and their representatives who are involved in making recommendations to their clients to comply with the following aspects: a) know your client; b) needs analysis; and c) documentation and record keeping 2. The objective of this guideline is to set out the minimum standard for the life insurance advisory process, covering all three aspects above, to be carried out by financial advisers and their representatives in advising their clients on life insurance products. 2. SCOPE 3. This guideline is applicable to life insurance products sold to individuals by financial adviser (FA) representatives of exempt financial advisers and licensed advisers. 4. For top-ups and subsequent policy alterations where advice will be provided, FA representatives may rely on information previously provided by the client if the client confirms that there are no material changes to the information. 5. This guideline is not applicable to: 5.1 Life products sold via direct marketing or other avenues where no advice is given. 5.2 Simple life insurance sold as an ancillary product to loans with a simple payment basis for the insurance cover, which includes policies that cover outstanding loans through personal loans, car loans, and credit card balances but does not include mortgage reducing term assurance plans. 5.3 Business insurance, such as keyman insurance or partnership insurance. 5.4 Group insurance, which includes: a) Group term life and group pure protection insurance products, where an employer or association is the policy owner; or b) Yearly renewable products such as credit life and pure protection insurance products that are sold on a group basis. LIA MU 20/14 of 18 Aug 2014 Page 2 of 6
6. Notwithstanding the above, financial advisers and their representatives have to ensure that due consideration is given to client s goals, financial situation and particular needs before making any recommendation. 3. MINIMUM STANDARD FOR LIFE INSURANCE ADVISORY PROCESS 7. The minimum standard for life insurance advisory process as set out in Appendix A (Life Insurance Advisory Form) covers the following sections. Sections 8. General information about the financial adviser and the status of the representative a) Information on financial adviser b) Status of the representative c) Importance of obtaining sufficient information highlighted 9. Know your client, which includes obtaining client s a) Personal information b) Priorities and objectives c) Investment profile d) Cash flow and budget e) Assets and liabilities f) Existing insurance portfolio 10. Needs analysis, which covers client s a) Protection needs b) Savings and investment needs c) Accident and health insurance needs 11. Representative s recommendation, which sets out a) Client s objectives b) Recommended plans c) Reasons for recommendations d) Risks and limitations of recommended plans e) Reasons for deviation, where applicable 12. Replacement of policy 13. Declaration by FA representative 14. Acknowledgement by client 15. Supervisor s review LIA MU 20/14 of 18 Aug 2014 Page 3 of 6
Guidance notes 16. In advising their clients on life insurance products, FA representatives are required to disclose their status and the financial adviser they represent, and highlight to their clients the importance of providing sufficient information to ensure that proper needs analysis and recommendation is made. 17. With the exception of Section 4 Investment Profile, which is product type specific, FA representatives are required to take their clients through every section in the life insurance advisory form as set out in Appendix A. Where a client does not want to provide the information required, the representative must clearly document the client s decision. 18. Section 4a Investment Risk Profile must be completed if advice is given for products with cash value. Section 4b Customer Knowledge Assessment must be completed if advice is given for Unlisted Specified Investment products. 19. FA representatives are required to perform needs analysis on client s priorities and objectives based on the information provided. 20. In making the recommendations, FA representatives are required to explain the reasons for recommendations, highlight risks and limitations of the recommended products and clearly state reasons for any deviation from client s investment profile or objectives and priorities, where applicable. 21. FA representatives must also highlight and document the risk and reasons for replacement of policy in the life insurance advisory form, where applicable. 22. Every Life Insurance Advisory Form must be signed off by FA representative and the client, and reviewed and endorsed by the supervisor of the representative, or another supervisor when the immediate supervisor is not available. Where the supervisor disagrees with the needs analysis or recommendation, the FA representative is required to inform the client of the outcome and make the necessary rectification. Modifications allowed 23. Financial advisers may modify the wordings found in the Life Insurance Advisory Form (Appendix A) and the sequence in which the sections and questions are presented, as long as there is no material deviation from the underlying intent. 24. As this guideline sets out the minimum standard, financial advisers may augment the Life Insurance Advisory Form with additional information request or set a more stringent standard as the case may be. LIA MU 20/14 of 18 Aug 2014 Page 4 of 6
4. RESPONSIBILITIES OF REPRESENTATIVE, SUPERVISOR OF THE REPRESENTATIVE AND FINANCIAL ADVISER Responsibilities of FA representative 25. The representative is required to conduct a proper needs analysis based on the information obtained in the Life Insurance Advisory Form before making a suitable recommendation. When making a recommendation, the representative is required to explain and document clearly the basis of the recommendation, taking into consideration the nature and objective of the product, key risks and other features including duration and fees. 26. The representative is required to treat the information received from the client with confidentiality. The representative should not disclose any information acquired from the client without prior consent unless it is in relation to an insurance application and where there is a public duty or legal or professional obligation to disclose such information. 27. In the event where rectification needs to be made to the Life Insurance Advisory Form submitted by the representative, the representative is required to take prompt action to inform the client of the outcome and perform the necessary rectification. Responsibilities of supervisor of the representative 28. The supervisor is required to review and endorse the Life Insurance Advisory Form to ensure it is duly completed and the recommendation made by the representative is suitable in meeting the client s objectives. Where a recommendation is found to be inappropriate, the supervisor should take prompt action to notify the representative to make the necessary rectification. 29. The supervisor may rely on a checklist when reviewing the Life Insurance Advisory Form submitted by the representative to minimise the risk of inadequate documentation or inappropriate recommendations. For a suggested checklist, refer to Appendix B (Supervisory Checklist for Life Insurance Advisory Process). Responsibilities of Financial Adviser (FA) 30. The FA needs to ensure that the supervisor and representative are properly trained and competent to carry out their responsibilities, as required under the life insurance advisory process. 31. The FA is required to ensure that a copy of the Life Insurance Advisory Form is provided to a client in relation to the purchase of a life insurance policy. 32. The FA is required to ensure proper record keeping of the Life Insurance Advisory Form submitted by the representative for the purpose of review and audit. 33. The FA is required to conduct regular reviews of the Life Insurance Advisory Forms received, customer surveys, call-backs and mystery shopping to ensure that their supervisors and representatives comply with the requirements of the life insurance advisory process. LIA MU 20/14 of 18 Aug 2014 Page 5 of 6
34. Where the FA uncovers any issues arising from the life insurance advisory process conducted by the supervisor and/or representative, the FA is required to conduct training to ensure that they are acquire the necessary competency, and take appropriate disciplinary action, where necessary. 5. DISCIPINARY ACTION FOR NON-COMPLIANCE OF REPRESENTATIVE AND SUPERVISOR 35. The FA is required to put in place appropriate disciplinary measures, which may include penalties ranging from issuance of warning letter to contract termination, for situations where the supervisor and representative fail to discharge their responsibilities. 36. Failure of the supervisor and representative to discharge their responsibilities in the life insurance advisory process should also be taken into account in the balanced scorecard framework, which determines their performance and remuneration. End of document LIA MU 20/14 of 18 Aug 2014 Page 6 of 6