A new paper on the consumer impact of Approved Product Lists (APLs) claims institutionally-aligned Australian Financial Services Licensees (AFSLs) are funneling new clients into in-house products, potentially in breach of Best Interest Duty obligations.
Whistleblower Jeff Morris has urged the government to ban the use of APLs by vertically-integrated advice licensees, saying the industry lacks the ability to properly manage conflicts of interest.
"In putting this paper together, it became clear that institutionally-aligned AFSLs knew all the right things to say and how to look remorseful but scratch the surface and there have been no real changes to the culture and practices inside these organisations," Morris said.
The paper commissioned by ClearView and titled Approves Product Lies: Combating the manipulation of advice, claims there is no reasonable basis to exclude from advice consideration any of the 12 retail life insurers regulated by the Australian Prudential Regulation Authority.
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"Heavily restricted life insurance APLs are still the norm and not even heat from the recent Financial Services Royal Commission has been enough to compel them to apply higher standards and put their clients first," Morris said.
ClearView managing director Simon Swanson said a sales culture is still alive inside vertically integrated organisations and the data continues to raise "serious concerns" about the advice industry's structure.
"One of the most notable observations is that ClearView and most boutique AFSLs encourage their advisers to choose the most appropriate life insurance solution, based on a client's circumstances, needs and objectives.
"On the other hand, the majority of institutional licensees continue to operate limited APLs to ensure that new business flows through to related-party products," Swanson said.
The report claims that the Financial Services Council's APL standards only applied to around 20 advice licensee members, and not to the majority of Australia's 1500 AFSLs.
"The non-aligned segment of the market has been built by advisers fleeing institutional control and influence. Their value proposition is predicated on having no ownership ties to a product manufacturer and product choice," Morris said.
"A formal APL serves to direct advisers to a limited list, with licensee-level approval required to go 'off-piste' for any one client's product solution. In contrast to the principle of dictating where to direct business, many non-aligned advisers actively avoid those insurers which, experience has told them, provide less efficient or less 'fair' treatment of policyholders.
Morris explained that, as such, preferred provider lists often bear no resemblance to APLs.
The report partially attributes a "distinct lack of innovation" in life insurance to limited APLs which have shielded institutional life insurers from competitive pressures for decades and effectively mitigated the risk of competition and evolution.
"If the nature, purpose and intent of the Future of Financial Advice reforms and the Royal Commission's recommendations are to improve advice quality, address conflicts of interest and boost transparency to ensure a better deal for consumers then I don't see how restricted APLs can co-exist in the new regulatory environment," Morris said.
"APLs are at odds with the government's agenda and changing community standards, and it is time for unrestricted choice of life insurance provider to be mandated."
The report traces the inception of APLs back to the 1980s and tests the APL hypothesis, which Morris concludes does not stack up.
"I discovered that the pioneers of risk research in Australia were motivated by an altruistic desire to help advisers interpret and understand complicated, technical and sometimes 'unsafe' policies, the purveyors of which practiced zero adviser training or education on the policy terms and conditions," Morris said.
"My assessment is that restricted life insurance APLs are unsustainable and unjustifiable in the emerging financial advice profession."
Morris reached out to some institutional licensees with a number of questions relating to their life insurance APLs, their intention to broaden the options and if they receive payments from third party life insurers, amongst other things.
The report includes responses from MLC Advice, Commonwealth Bank and IOOF, gathered as part of a survey conducted by Morris. All of which said they were confident in the in their practices.
David Wappett, head of research and relationship manager at MLC Advice said: "We provide a range of additional resources to ensure our advisers understand the way APLs are constructed...and have a process that enables them to select products that are not on the APL if it is not in the client's best interest to do so."
"That process is actively used by advisers when necessary and we are confident it is not onerous."
General manager of advice at MLC Advice, Darren Whereat said: "We remain supportive of an APL that ensures advisers have access to a wide range of insurers, allowing them to meet their clients' needs under their best interest obligations."
Mack Ballantyne, general manager of Financial Wisdom at Commonwealth Bank said: "The insurance APL provides advisers with a highly-researched shortlist that we believe would be appropriate for most customers in most circumstances, however, we provide research tools to our advisers which allow these policies to be compared against almost all life insurance products in the market."