Risk Advice and Advice Risk: 6 Lessons from Couper
In the context of Commissioner Kell's crusade against commissions, churn and conflicts, risk advisers' processes have started to attract a heightened degree of regulatory attention. Despite the expected legislative roll back of some FOFA elements, regulatory scrutiny of risk advice is only likely to increase in the wake of the New South Wales Court of Appeal's decision in Commonwealth Financial Planning Limited v Couper  NSWCA 444.
CFP v Couper is particularly interesting because of the likely consequences and practical implications of the decision. It’s an important case for risk advisers and you'll need a general understanding of the case to appreciate its impact.
At the risk of oversimplification, the client, Mr Stevens, was advised to replace a longstanding Westpac insurance policy with a new policy issued by Comminsure, an Insurer with whom the adviser was associated. The recommendation was accepted, the new policy issued and the old policy cancelled. However, when the client was subsequently diagnosed with pancreatic cancer the Insurer voided the contract from inception on the basis of non-disclosure.
The Insurer was entitled to do so at law and their decision to avoid the contract for non-disclosure was neither challenged nor criticised. The CFP adviser who made the recommendation was, on the other hand, found to have acted negligently and engaged in misleading and deceptive conduct. CFP appealed the decision but this finding was upheld on appeal.
The case itself has been addressed elsewhere. One can debate the reliability, responsibilities and faults of the various parties without ever achieving absolute certainty; but, in any event, there are six key lessons Advisers, Licensees and PI Insurers should draw from Couper.
The adviser “was too hasty and failed to sufficiently impress upon Mr Stevens the risk he took in replacing one policy for another.”
It’s ironic, but now generally accepted, that increasing the length and detail of the disclosures and warnings in the Statement of Advice (SoA) has actually reduced clients’ capacity to understand and properly appreciate those statements. There’s been another unanticipated consequence of this “belts and braces” approach; advisers have generally approached these important elements by focussing on the form of the disclosure (and their Licensee’s checklist of required disclosures) rather than on the purpose of the disclosure – which is to assist their client to make an informed decision about the advice provided to them.
As a consequence, critical disclosures and warnings are often overlooked, marginalised or underemphasised. Unfortunately, neither Licensees, advisers or clients have had any real appreciation of the consequences and implications of this approach.
Couper may change this dynamic because despite the structured advice template provided by the adviser, he failed to warn his client that commencing a new risk policy affords the new Insurer an opportunity to avoid the contract in the event of a claim. The right is not absolute, but, in this case, neither the adviser nor the client was aware of this risk.
Risk Advisers should appreciate that section 29(3) of the Insurance Contracts Review Act 1984 (Cth) entitles an insurer to avoid a life insurance policy for non-fraudulent non-disclosure within three years of commencement.
Regardless of whether Mr Stevens’ Westpac policy was originally secured on the basis of his non-disclosure of relevant matters, the age of that policy meant that Westpac would have had no right to avoid the contract for non-disclosure in the event of a claim. However, by commencing a new policy with another insurer, Mr Stevens lost this significant benefit (which, incidentally, was not identified as a consequence in the replacement product section of the SoA).
Accordingly, the Court found that the adviser had negligently failed to comply with his “duty to ensure the plaintiff was adequately informed of the consequences of potential material non-disclosure of health and related matters, which an underwriter … would regard as being material to the risk”
This risk should be prominently addressed wherever replacement product advice is provided and particularly where the advice is based on limited information about the client or their relevant personal circumstances. It is not enough to include it in the SoA; the risk should be clearly discussed with the client and that discussion noted. It would also be prudent to address this specific risk more explicitly in the Authority to Proceed.
2. Research & Consideration
“Mr Stevens was given to understand that he was getting a like for like policy, which, in reality, he was not.”
The quality of the research undertaken by the adviser was not addressed by the Court directly, but it did highlight a common deficiency of most replacement product advice; the price a risk adviser quotes for a new policy (and on which the replacement product assessment relies) is a “best case” price. Most advisers understand this fact, but the Court found that providing a "best case" price may be misleading and deceptive conduct when it is used as the basis of a like for like comparison.
Except in the case of automatic acceptance, the adviser cannot know the final price that will be determined by the Insurer until after the completion of the underwriting process. At best, the adviser’s recommendation will be immaterially inaccurate but, at worst, as in this case, it will be misleading and deceptive. The recommendation must therefore be clearly and appropriately qualified to ensure that the client understands the limitation of the quotation recorded in the SoA.
“The unequivocal advice that the Comminsure policy was cheaper on a like for like, dollar for dollar basis was incomplete. That was merely the best case and could not be assessed definitively at that stage.”
“There were some advantages in the wording of the Comminsure policy compared to Westpac Life’s but they were substantially the same. A motivating factor from the point of view of Comminsure was to obtain more business at the expense of its competitor.”
In a blow to vertically integrated advice businesses, and in vindication of ASIC’s historic position, the Court found that conflicts of interest were at the heart of these advice failures.
The Court found that the policies were largely identical but the adviser recommended the Group product because this was “the only way by which [the adviser] could earn a fee”.
One would imagine that, post FOFA, the best interest duty and the client priority rule would adequately address this pressure. But the conflict issue does not appear to be the direct cause of the adviser’s “negligence” nor his misleading and deceptive conduct – both of which were driven by an acknowledged ignorance of s29(3) and a failure to appreciate the limitations and implications of the advice.
The conflict issue is a distraction from the underlying failures. If the adviser had followed the same process, but, for example, recommended MLC instead of Comminsure, his “negligence” would not have been less nor would his recommendation been any less misleading and deceptive. So why introduce this element except to suggest that recommending the products of an associated entity is inherently more problematic than recommending those of an unrelated party.
As a result, an adviser recommending an in-house or related product should perhaps take additional steps to ensure that the recommended product is demonstrably better than the product it replaces.
“Mr Stevens was misled and deceived into thinking that the new policy protected his estate, when in fact it was avoidable. The second was that the representation that the Comminsure policy was better than the Westpac policy was misleading, because the latter was not avoidable”
The adviser’s replacement product advice, and his allegedly flawed discovery process, should have been adequate enough to support the Court’s criticism of his advice and his advice process. But the Court went further, and drew attention to the inherent limitations of basing a like for like comparison on the first year’s premium. “[The adviser’s] comparison of premiums was confined to the first year. But he was attempting to sell a product designed to last a lifetime. It was misleading to confine his comparison to the first year’s premiums”.
Unfortunately, this approach is standard industry practice and one might question the practicality of an alternative that attempts to compare costs over the lifetime of the product.
Quite apart from the Insurer’s right to change product pricing, few consumers maintain the same insurance policy over the course of their lifetime. Should an adviser model the product to age 65? To a date suggested by the mortality tables? Or for the next eight years (which would probably be the Insurers’ preference)?
While the Court provides no clarity on this issue, it’s clearly signalling an expectation that an adviser should look beyond the first year’s premium before making any statement about costs, consequences and the appropriateness of the product replacement recommendation.
“Those are not alternatives in any meaningful sense …A true alternative was necessarily an alternative within the scope of the advice [the adviser] had been retained to provide”
I’ve long been of the opinion that advice must involve the objective consideration of alternatives and that the automatic recommendation of an in house product solution is a product sale and not an activity that should ever be confused with advice.
In this case, the Court was critical of the alleged "alternatives" presented in the SoA; the client lacked the assets to self-insure and did not contemplate a broader personal insurance review. It appears that the Court considered that the alternatives presented to the client were padding, lacking in credibility and failing to consider the scope of the advice the adviser had been asked to provide.
Professionalism, one might infer from their reasoning, requires advisers to consider real, meaningful and relevant alternatives as part of their advice process and to explicitly link those alternatives to the client’s needs and objectives.
6. Best Interests
“ .. it was within the scope of the duties of a financial planner giving an unsophisticated person advice to ensure that the person in question was being given recommendations that were in his best interests, without a conflict arising with the interests of the seller of the products being recommended.”
The advice to Mr Steven’s was provided before the introduction of the Best Interests duty, but the Court made several references to this legal obligation in their decision. Importantly though, the absence of the explicit statutory duty did not prevent the Court from imputing this obligation to pre-FOFA conduct.
Consideration, objectivity, professionalism and client preference are at the heart of any financial adviser’s duty to their client. In this case, a failure to demonstrably meet these standards was the foundation on which the finding of negligence ultimately rested.
However, in a final criticism of the template nature of advice documents the Court acknowledged the “real tension between the exhortations in the Statement of Advice acknowledging the need for the client to “take full ownership” of his financial decisions, to take his time to read and understand and “feel completely comfortable” with the advice, and what actually happened”
To better manage this risk an adviser should ensure that their advice process demonstrates that their client was actually afforded the time and opportunity to consider the advice provided to them.
(c) Sean Graham 2014.
 “if the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract” s29(3)
 Couper, op cit, @79
 ibid @80
 ibid @94
 ibid @39
 ibid @10
 ibid @87
 ibid @25
 ibid @85
 ibid @90