Replacement risk cover during a volume-incentive quarter
Ben is a financial adviser at a licensed FAP, specialising in risk insurance. Priya, 41, a self-employed graphic designer with $95,000 of annual income and a $420,000 mortgage, has held trauma and income protection cover with Insurer A since 2019. Her income protection pays $3,000 a month after a 60-day wait. Ben cold-called her during a quiet quarter. Insurer B is running a competition: advisers who write $1 million of new premium in the quarter win a paid trip to Queenstown, and Ben is $180,000 short with two weeks to go. Insurer B's quote for Priya is $22 a month cheaper, but its income protection waits 90 days and offsets ACC more aggressively. Ben's file holds the premium comparison and Priya's signed application. It does not note the longer wait, the ACC offset, or that Priya would restart the pre-existing-condition clock. Ben's disclosure statement says only that 'commissions may be paid by product providers'.
1. Identify the conflicts of interest operating in this file and explain how the Code of Conduct for Financial Advice Services requires them to be managed, rather than merely disclosed.
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Two conflicts are running at once.
1. Remuneration conflict. Ben is paid by Insurer B, and the quote he is promoting is the one that pays him. Commission on replacement business is a direct financial interest in the client switching.
2. Volume/soft-dollar incentive. The Queenstown trip is tied to total new premium written in a short window, not to client outcomes. Being $180,000 short with two weeks left creates exactly the pressure the Code is designed to catch.
The Code's standards on integrity, fair treatment of clients, and managing conflicts of interest and incentives require more than a line saying commissions may be paid. Disclosure is necessary but not sufficient: the adviser must manage the conflict so it does not materially influence the advice. In practice that means:
- Applying the FAP's replacement-business policy, including a documented reasons-why-switch test.
- Escalating to the FAP's compliance function because a volume incentive is live in the same quarter.
- Testing the switch on the client's facts, not the premium. A $22 a month saving ($264 a year) is trivial against a 30-day longer wait on a $3,000 a month benefit: the client would be roughly $3,000 worse off per claim event in the early months, and the pre-existing-condition clock resets on a 41-year-old with an existing policy history.
- Being willing to recommend no change, and being able to show the file would have looked the same if no trip existed.
If the honest answer is that the replacement is worse for Priya, the conflict has been allowed to win.
2. What must Ben disclose to Priya, and in what form, before any replacement application is signed?
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Disclosure has to be specific enough that Priya can see the money and make a judgement about it.
Content:
- The nature and scope of the advice, including that Ben is giving replacement advice on existing cover.
- The commission Ben will receive from Insurer B on this policy, quantified (percentage and estimated dollar amount per year), not 'commissions may be paid'.
- The volume-based incentive: that Ben is participating in a campaign where new premium in the quarter earns a trip.
- Any other incentives, soft dollars or referral payments connected to the recommendation.
- The fees Priya pays, and how Ben is remunerated overall.
- The material differences between the two policies: 60 versus 90-day wait, ACC offset wording, trauma definitions, premium structure, and the reset of the pre-existing-condition period.
- How to complain, and that the FAP belongs to an approved dispute resolution scheme.
Form: written, given before or at the time the advice is given, in a form Priya can keep, and explained in conversation. Ben should check she has understood the trade-off, not just that she received a document, and record that check.
The test is whether Priya could look at the disclosure and say 'I see what you get paid and why you might prefer this option'. A generic commission sentence fails that test because it hides the size of the incentive and the trip that is driving the timing.
3. What should the advice file contain before the replacement proceeds, and what findings should cause Ben to stop?
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The file should contain:
- A feature-by-feature comparison of the two policies, covering wait period, ACC offset, trauma definitions and exclusions, premium structure and age-related increases, and any loyalty or no-claims benefit lost by leaving Insurer A.
- The client's stated reasons for considering the switch, in her words, and her understanding of what she is giving up.
- Ben's reasoning for why the switch is in Priya's interest, or a recommendation to stay.
- Signed commission and incentive disclosure, plus a note of the conversation (date, who was present, what was explained, what questions were asked).
- Evidence the advice was within Ben's competence and the FAP's scope, and any compliance review triggered by the incentive.
Reasons to stop and not proceed:
- The comparison shows a material client detriment (longer wait, narrower definitions, higher lifetime cost) not outweighed by a benefit the client actually values.
- The pre-existing-condition reset creates a real uncovered exposure given Priya's health history.
- Priya cannot articulate the trade-off after explanation, so the advice is not understood.
- The only reason the file exists is the trip deadline.
Ben can recommend no change and still be doing his job. A file that cannot show the analysis was done on the client's merits is indefensible later, whatever Priya signed on the day.