Commission, Replacement and the 'Cheapest' Instruction
Ana is a financial adviser at a small Auckland financial advice provider (FAP). Her client Ravi owns a 1960s warehouse insured with Insurer A. The policy renews in ten days at $18,400. Ana recommends moving to Insurer B, which pays her 15% commission and a $2,000 volume bonus if she writes $150,000 of new business this quarter. Insurer B's quote is $16,900, but its excess for water damage is $2,500 higher and it excludes gradual damage. Ravi's building was recently valued at $1.9 million, and he has made two small water-damage claims in three years. Ana discloses the 15% commission but not the volume bonus. Ravi says, 'Just do whatever is cheapest.' The FAP's compliance officer asks Ana to justify the replacement and her disclosure. Ana has not recorded a comparison of the two policies.
1. Identify the regulatory and ethical issues in Ana's conduct and explain how the Financial Advice Code standards apply.
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The issues are conflict of interest, disclosure, suitability and record-keeping. The 15% commission is a material remuneration disclosure, but the $2,000 volume bonus is also material because it creates an incentive to write volume through Insurer B this quarter. Disclosing one but not the other may mislead. Under the Financial Advice Code standards, Ana must act with integrity, manage conflicts, and give advice that is suitable for Ravi. 'Cheapest' is not a needs analysis: the $2,500 higher water excess and gradual-damage exclusion matter for a 1960s warehouse with two water claims. Replacing the policy without comparing cover could be unsuitable. The Code does not ban commissions, but the conflict must be managed and disclosed; if it cannot be managed, she should decline or refer. She must also keep records of the comparison and the client's decision.
2. What should Ana do before the renewal date, and what should she document?
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Before renewal Ana should: (1) obtain both full policy wordings and compare cover, limits, exclusions, excesses and conditions; (2) quantify the effect of the water excess and gradual-damage exclusion; (3) disclose the volume bonus in writing, not just the commission; (4) ask Ravi about his priorities and explain the trade-offs; (5) give a written recommendation that is suitable. If Ravi still chooses the cheaper policy after informed discussion, Ana can follow the instruction but should document that it is a client-directed choice, not her recommendation, and record the disclosure. She should not simply process the switch on 'cheapest'. If she cannot manage the conflict or the replacement is unsuitable, she should decline. The FAP compliance file should show the comparison, disclosure, client instructions and rationale. This protects Ravi and provides evidence for any later complaint.
3. If Ravi moves to Insurer B and later has a gradual-damage claim, what are the likely consequences and who bears responsibility?
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The claim will likely be declined because the Insurer B policy excludes gradual damage. Ana's comparison should have made that clear. The insurer is entitled to rely on its wording; the advice risk sits with Ana and the FAP. Ravi could complain to the FAP and then to the dispute resolution scheme, arguing the replacement was unsuitable or the conflict undisclosed. The FAP should assess whether Ana's advice met the Code and whether the client made an informed choice. If the file shows proper disclosure and a clear recommendation, the FAP's position is stronger; if not, remediation may be needed. This is why the file note and written disclosure matter.