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Hidden costs have nowhere left to hide

Financial Services Complaints Limited (FSCL) Chief Executive Susan Taylor has welcomed the new financial advice regime, which came into effect on Monday 15 March, stating that the additional legal duties and licensing requirements financial advisers (including insurance brokers) must adhere to, are a positive step towards improving industry standards.

Included in the new adviser requirements is a need to disclose more information to their clients.

“We believe the new disclosure regulations which form part of the new rules, including disclosing fees, commissions earned, and conflicts of interest are important in ensuring transparency. The client needs to understand what they are paying for,” explains Ms Taylor.

A recent case investigated by FSCL demonstrates how important this transparency is, after a couple, who are small business owners, discovered that what they thought were just insurance premium costs included fees for their insurance broker.

When Tony and Liz first placed their insurances through their broker in 2016, the broker send them a bundle of paperwork. With multiple policies for their business, the paperwork included all the coverage summaries.

There was one note that stipulated that premium charges may include a ‘documentation fee’. However, when the broker arranged for the renewal of Tony and Liz’s insurances each year in 2017, 2018 and 2019, the wording on the coverage summaries simply stated, ‘Policy Charge’.

It was only in late 2019 when the couple moved to a new insurance broker that they discovered that their original broker had charged them a total of $34,000 in fees within some of the ‘Policy Charge/s’ listed on the summary pages.

“Whether fees were included or not was not apparent from the face of the coverage summaries,” explains Ms Taylor, “they all simply had a dollar amount beside the words ‘Policy Charge’.

Tony and Liz were distressed to learn about the fees, especially as they had been under the impression that their monthly payments were for their insurance premiums only.

Tony and Liz said that they never saw the note that premium charges may have included a ‘documentation fee’ and that the broker had not drawn their attention to the sentence in the bundle of documents they received, which was over 50 pages long.

The broker said the fees, some of which were as high as $12000, were justified as they did a lot of work for the couple, that they took some of the lowest commissions from insurers when compared to their competitors, and that all they were required to do was to let Tony and Liz know that a fee “might be charged”.

FSCL formed the view that the coverage summaries were in fact misleading and in breach of the Fair-Trading Act 1986. FSCL recommended that the broker should refund $34,000 in undisclosed fees to Tony and Liz. 

“All the coverage summaries looked the same, giving the impression that ‘Policy Charge’ was simply the premium payable. It is ok to charge fees, but it is not ok to hide them,” Ms Taylor says, “If you hide them, then you do not have your customer’s genuine agreement to pay them.”

The new disclosure requirements specifically outline that advisers must disclose all the ways they will earn income when clients use their services, including:

  1. Having general information on their websites about when clients may be charged fees.
  2. 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 services, and
  3. Providing clients again with the detailed information about the income the adviser will earn, at the point they actually give their clients the advice.