In September 2015, Callum was contacted by a financial adviser who had obtained his contact details from a contractors’ list (of mainly self-employed tradespeople). The adviser asked Callum whether he would be interested in reducing his ACC cover and putting the levy savings towards an insurance policy called Specific Condition Cover (SCC). The adviser said he met Callum and conducted a fact-find, including gathering information about Callum and his family’s financial position, and the insurance policies they held.
Information the adviser said he provided to Callum
The adviser said that he explained to Callum that CoverPlus is the standard ACC cover for self-employed people, where the ACC will pay compensation up to 80% of a person’s income. However, ACC’s CoverPlus Extra allows the self-employed person to choose how much of their income they want covered, and the ACC pays up to 100% of the agreed amount. This gives people the option to reduce their ACC levies if they choose a sum insured amount that is lower than 80% of their income.
The adviser also said that he spoke with Callum about the private insurance cover he should consider taking out, alongside CoverPlus Extra. The adviser said he explained that if Callum wanted a direct swap for the cover he currently had under CoverPlus, he would need to have CoverPlus Extra and some income protection cover. However, because income protection cover was expensive, and appeared to be outside Callum’s budget, an alternative was taking out SCC.
The adviser said he told Callum that SCC was not as comprehensive as income protection cover but could provide cover for specific medical conditions or medical events. The adviser used various diagrams, on several pieces of paper, to explain to Callum the different options available. Callum and the adviser met again a month later, and the adviser said he re-explained the different options to Callum, referring again to the various diagrams.
The adviser obtains quotes for Callum
Callum then asked the adviser to provide quotes for life, trauma, and medical insurance, and SCC cover at $5,000 per month (because SCC was cheaper than income protection cover). Further meetings occurred in November 2015 and February 2016 to discuss the quotes. The adviser provided Callum with further pieces of paper with diagrams to show the options available, and the various prices.
Callum decided to take out life, trauma, and medical policies. He also decided to keep his ACC cover as CoverPlus and take out SCC of $5,000 per month. His policies were issued in February 2016.
Callum contacts the adviser in June 2016
In June 2016, Callum contacted the adviser to increase his SCC by another $5,000 per month (up to $10,000), because he’d had a significant income increase. It was decided that Callum would apply for CoverPlus Extra, with a sum insured of $24,500 (being much lower than 80% of his income). The adviser said he advised Callum to take out some income protection cover, but Callum did not want to do this – he wanted to keep the SCC cover.
In February 2018 Callum had a serious accident which left him severely disabled and unable to work. Callum submitted claims to his insurer and was paid under his life and trauma policies. However, when Callum did not receive as much as he expected under his ACC and SCC policies, he complained to the adviser that he’d not provided suitable advice. The adviser said he’d provided reasonable financial advice and had not caused Callum any loss. Callum complained to FSCL.
Callum said that when his ACC cover was reduced in June 2016 (when he switched from ACC CoverPlus to ACC CoverPlus Extra), it was with the expectation that he would have sufficient private insurance cover in place to counteract the reduction. Callum said the adviser failed to warn him of the risk of dialling down his ACC cover without having income protection in place.
The adviser said that he’d outlined all the cover options to Callum and the associated risks of each option. Overall, the adviser considered he had provided reasonable financial advice to Callum.
The care, diligence, and skill of a reasonable financial adviser
Our starting point in reviewing the complaint was section 33 of the Financial Advisers Act 2008 which says: ‘a financial adviser, when providing a financial adviser service, must exercise the care, diligence, and skill that a reasonable financial adviser would exercise in the same circumstances.’
No statement of advice
We noted that the adviser had failed to provide Callum with a full statement of advice. We could appreciate that the adviser had met with Calum several times and provided him with several diagrams of the different cover options available to him, along with the prices. However, best practice is to provide clients with a full written statement of advice which they can take away and consider in their own time. In a statement of advice, the adviser could have set out in writing the differences between the cover options available to Callum.
No records of the advice provided
However, there was no record that the adviser had set out the difference between SCC and income protection cover, and the advantages and disadvantages of remaining on ACC CoverPlus or shifting to CoverPlus Extra. There were no contemporaneous file notes to support the adviser’s view that he had given Callum enough information about the different insurance options available so that Callum could make an informed choice about which option to choose. The lack of records was a significant shortcoming in the adviser’s advice process.
In situations where there are no contemporaneous file notes, we place more weight on the consumer’s recollection of events. This is because the situation is more memorable to them, compared to an adviser who deals with many clients over the space of weeks and months.
Callum said the adviser did not explain the different options available to him, and we favoured Callum’s position. We said the adviser did not meet the requirements of section 33 of the Financial Advisers Act because he did not provide suitable advice, in a clear way, to enable Callum to make an informed decision. We got the distinct impression Callum thought that if he was unable to work for any length of time, he would have his entire income covered. Because Callum had been provided different pieces of information on different pieces of paper, in shorthand diagram form, and this information was provided to Callum at different times, we could understand why Callum was confused about the cover he had.
What was the effect of the advice shortcomings?
We next considered what would have happened if the advice process had been better. We said that because traditional income protection cover was cost-prohibitive for Callum, it was more likely than not that he would never have taken out income protection cover and would always have taken out the SCC.
However, Callum did have the option, when he reviewed his insurance cover with his adviser in mid-2016, to remain covered under CoverPlus instead of moving to CoverPlus Extra. Under the traditional CoverPlus, Callum would have received 80% of his income, which was significantly more than the $478 he was receiving per week (being a weekly proportion of the $24,500 sum insured under CoverPlus Extra).
We said it was not the best advice for Callum to dial down his ACC cover in mid-2016 if he was going to remain under an SCC policy. In other words, instead of spending the savings from his decreased ACC levies on increased SCC cover, by our calculations, it appeared Callum would have been better to simply continue with ACC CoverPlus and keep his SCC at $5,000 per month. By dialling down his ACC cover, much of the risk of covering Callum’s income was transferred to the SCC policy. However, the cover under that policy was much more limited than the broader coverage available under ACC CoverPlus (in terms of protecting income).
We then calculated what the difference would have been if Callum had remained covered under CoverPlus compared to what he received under CoverPlus Extra. We assisted the parties in negotiating a settlement, which took into account several factors including the likelihood of Callum recovering and his future employment prospects, and whether he would survive to retirement age.
The parties reached an agreement that the adviser, without any admission of liability, would pay $200,000 to Callum representing the difference in the amount he would have received up to retirement age if he’d remained on CoverPlus.
Insights for participants
Advisers are expected to keep good records of the advice they provide. This is why providing a written statement of advice is such a critical step in the advice process. During the process of giving verbal advice, there is often a disconnect between what the adviser considers the consumer understands from the information being given, and what the consumer actually understands from the conversations. However, if a statement of advice is provided to the client after the verbal advice is given, there is a reduced chance of any miscommunication.
It is common for financial advisers to provide verbal advice and use several diagrams to outline the different options available. However, without a written record of the advice provided, it is difficult for the adviser to prove after the fact that they actually outlined, in a clear and meaningful way, the risks and benefits of the different insurance options available so that clients can make informed decisions.