Tony and Liz are small-business owners. In 2020, Tony and Liz began to suspect that their former insurance broker had charged them fees without telling them.
When Tony and Liz first placed their insurances through the broker in 2016, the broker sent them a bundle of paperwork. Tony and Liz had multiple policies for their business, and the paperwork included all the coverage summaries. Each of the coverage summaries included the following box, with the amounts noted beside each line item:
The paperwork also included a page with the heading, ‘Important Information’. One sentence on the page said: ‘PLEASE NOTE: Your premium charges may include a documentation fee.’ That was the only information Tony and Liz say they ever received from the broker that mentioned there might be a fee charged for the broker’s services.
The broker arranged for renewal of Tony and Liz’s insurances each year in 2017, 2018, and 2019. Sometimes Tony and Liz needed assets added to or taken off their policies between renewal periods – the broker arranged those as well. Each time, the wording on the coverage summaries was the same: ‘Policy Charge’.
Late in 2019, Tony and Liz moved to a new insurance broker. It was about this time that they began to suspect their former broker had charged them fees without telling them. Tony and Liz complained to FSCL.
We investigated the broker’s dealings with Tony and Liz. We discovered Tony and Liz were right: between 2017 and 2019, the broker had charged them a total of $34,000 in fees. It turned out that the broker had included fees for their broking services ranging from between $2,500 to $12,000 within some – but not all – of the ‘Policy Charge/s’. Whether fees were included or not was not apparent from the face of the coverage summaries: they all simply had a dollar amount beside the words ‘Policy Charge’.
Tony and Liz were distressed to hear about the fees. All along, they had been under the impression that their monthly payments were for their insurance premiums only.
Tony and Liz told us they never saw the sentence about premium charges possibly including a documentation fee – the bundle of documents they had received was over 50 pages long, and the broker had not drawn their attention to that sentence.
The broker said the fees were justified as they did a lot of work for Tony and Liz (Tony and Liz disputed this). The broker also told us that they take some of the lowest commissions from insurers, when compared with their competitors.
The broker said that all they were required to do was let Tony and Liz know a fee might be charged. The broker said they had done that, by including the sentence about premiums possibly including a documentation fee.
Insurance brokers are entitled to be paid for the work that they do. Generally, they are paid by commission from the insurer, but they are also allowed to charge a fee as well – provided it is disclosed.
We looked at Tony and Liz’s complaint through the lens of the Fair Trading Act 1986, and we formed the view that the coverage summaries were misleading. Combined with some supporting documentation, they gave the impression that a ‘Policy Charge’ was simply the premium payable.
All the coverage summaries looked the same, whether a fee was included in the ‘Policy Charge’ or not. No one would know, by looking at the coverage summaries, which one included a fee, and how much that fee might be. We found that the broker had hidden the fees within the ‘Policy Charge/s’.
We did not think that the sentence about premiums possibly including a documentation fee was enough to displace the misleading impression created by the coverage summaries. Most people would assume that, if a ‘documentation fee’ were to be included in a ‘premium charge’, that would be made clear in the coverage summary. And, in any event, the term ‘documentation fee’ in and of itself was misleading. The term ‘documentation fee’ was not sufficient to inform Tony and Liz that the broker was charging a fee for their services. We also thought that the broker should have drawn the possibility of charging a fee for their services to Tony and Liz’s attention clearly and explicitly, especially if they planned to rely on it to charge fees as high as $12,000 at a time.
We didn’t need to analyse how much work the broker had done for Tony and Liz as the fees had not been disclosed.
We issued a final recommendation that the broker had breached the Fair Trading Act and should refund $34,000 to Tony and Liz.
Insights for participants
It is OK to charge fees. But it is not OK to hide them. If you hide them, then you do not have your customer’s genuine agreement to pay them.
Under new disclosure requirements on financial advisers (including insurance brokers) in force from 15 March 2021, advisers must disclose all the ways they will earn income when clients use their services. This includes:
· having general information on their websites about when clients may be charged fees
· when first meeting or communicating with clients and once the scope of the advice to be provided is known, providing detailed information about the income the adviser will earn if the clients use the adviser’s service, and
· providing clients again with detailed information about the income the adviser will earn, at the point they actually give their clients the advice.