Failure to act in client’s best interests

Sobitha’s financial adviser had arranged her insurance for years. In 2013, Sobitha separated from her husband and was reviewing her finances. She asked her financial adviser to reduce her life cover from $1,000,000 to $500,000 and her trauma cover from $400,000 to $200,000. These policies were accelerated policies, which meant that if Sobitha claimed under both policies, the amount she received under the trauma claim would later be deducted from the amount of life cover, leaving her estate with $300,000 rather than $500,000.

Sobitha’s financial adviser saw this change as an opportunity to review Sobitha’s cover and said that she should also purchase income protection insurance of $5,000 a month with a different insurer. Sobitha completed the first page of the insurance application form and signed the final page, and her financial adviser completed the rest of the application.

On the first page of the form Sobitha had to indicate whether she was a smoker or non-smoker. The smoker box was ticked, then crossed out, and a tick placed in the non-smoker box. Sobitha said that she had told her financial adviser that she had recently started smoking to cope with the stress of her break-up and her financial adviser told her “not to worry about it” and tick the non-smoker box.

Sobitha’s financial adviser’s recollection was different. At one point he said that he could not remember discussing her smoking status with Sobitha but would never have told her to tick the non-smoking box if she was a smoker. On another occasion he said he did remember discussing Sobitha’s smoking status and told her that if she had smoked at all within the last 12 months, she should tick the ‘smoking’ box.

The financial adviser went on to complete the rest of the form, including indicating that Sobitha had no insurance with any insurer. This was incorrect as the financial adviser knew he had arranged life and trauma cover for Sobitha with another insurer.

When the financial adviser came back to Sobitha with the income protection insurance proposal, Sobitha insisted that she just wanted to reduce her existing cover. The financial adviser then explained the shortcomings of the accelerated policy he had previously arranged.

The financial adviser recommended that Sobitha change to a standalone policy. Under a standalone policy, if Sobitha claimed against the trauma policy, she would receive $200,000 and if her estate claimed under the life policy, it would receive $500,000.

Sobitha agreed that a standalone policy sounded better and did not cost much more than the accelerated policy she already had, so asked her financial adviser to make the change. The financial adviser told Sobitha that to make this change she would need to go through a new application process with her existing insurer and since she had already applied to a new insurer for income protection cover, that she was not proceeding with, it would be easier for her to purchase trauma cover of $200,000 and life cover of $500,000 on a standalone basis from the new insurer. Sobitha accepted this advice and the financial adviser arranged the trauma and life cover on a standalone basis with Sobitha’s declaration that she was a non-smoker and did not have any insurance with any other insurer.

In 2019 Sobitha was diagnosed with breast cancer. When she checked her policy, Sobitha saw that she was recorded as a non-smoker and thought there would be no point lodging a claim. When Sobitha was talking about her situation with a friend, the friend suggested that Sobitha call her insurer and explain that she had ticked the non-smoking box because her financial adviser had told her ‘not to worry about it’.

Sobitha’s insurer responded that they could have avoided the policy from the outset on the basis of non-disclosure but agreed to recalculate the amount of cover Sobitha’s premiums would have bought at smoker rates. Sobitha’s insurer paid her $80,000 under her trauma policy.

However, Sobitha said that her financial adviser’s advice ‘not to worry’ about her smoking had cost her $120,000. The financial adviser said that it was Sobthia’s own fault for signing a form stating that she was a non-smoker when she knew she was smoking again and did not consider he had any liability for her loss.

Sobitha complained to FSCL.

 

Dispute

Sobitha said she had relied on her financial adviser’s advice when changing insurers in 2013. Although she agreed she should not have signed the form stating that she was a non-smoker when she knew that this was not the case, Sobitha said she trusted her financial adviser when he told her not to worry about it. Sobitha also said that if her financial adviser had just done what she originally asked him to do, that was to reduce her cover with the same insurer, she would have been paid the full $200,000 in trauma cover. Sobitha said that her financial adviser did not tell her about the risks she was running in changing insurers. In addition, Sobitha said the financial adviser had contacted her in 2015 and 2017 about updating her cover. She felt like every time he was in contact with her, he was trying to sell her something.

The financial adviser said that his advice in 2013 improved Sobitha’s financial situation and any other financial adviser would have done the same. Sobitha had replaced an accelerated policy with a standalone policy.

 

Review

We asked the financial adviser for all the information he had about the 2013 insurance application process. The financial adviser was able to give us his email correspondence with Sobitha but there was no needs analysis, diary notes, or written reasons to support his recommendation to Sobitha to change insurers. There was also no advice about the risks of replacement insurance on file.

The financial adviser was able to provide a needs analysis completed in 2001 but had no other documentation about any of the insurance recommendations he had made over the years.

Although the financial adviser was a registered financial adviser and not an authorised financial adviser, and so his record keeping obligations were not as high, he was a member of a professional body that required a high standard of care, including the obligation to put the client’s needs first.

We asked an independent financial advice expert to tell us what would have been expected of the financial adviser in 2013. The expert said the financial adviser would not have earned any commission for reducing cover with the existing insurer but would have been paid commission by the new insurer. The expert also confirmed that even though Sobitha had started smoking, her original insurer was obliged to accept her as a non-smoker if no other change was made to her insurance cover.

Without adequate records to show that the financial adviser’s recommendations to Sobitha were in her best interests, or any records to show the risk of replacement insurance had been discussed, it was our view that the financial adviser had been negligent, and had failed to exercise reasonable care when advising Sobitha and was partly responsible for her loss.

 

Resolution

We suggested that the financial adviser pay Sobitha 75% of her loss, or $90,000, on the basis that Sobitha had also contributed to her loss by signing a form containing a statement she knew to be incorrect. We also said that the financial adviser should pay Sobitha $2,000 as compensation for the inconvenience and stress his poor advice had caused.

Sobitha accepted our view but the financial adviser did not. The financial adviser admitted that his service was not as good as it could have been but maintained that Sobitha was entirely responsible because she had signed the form. We did not agree and told the adviser that our views on the merits of Sobitha’s case had not changed.

Sobitha then said that she felt she had also suffered a loss with respect to the life cover. Sobitha’s insurer recalculated the life cover based on smoker rates and, taking into consideration the accelerated compared to standalone policies, Sobitha would have $140,000 less cover if a claim was ever made on the life policy. Sobitha said she would like to increase her claim to reflect this loss.

We agreed that Sobitha had suffered a loss with respect to the life cover, but that the loss was not $140,000 because Sobitha may never have to make a claim on the life policy. We said we would need an actuary to calculate the value of Sobitha’s loss.

Sobitha then proposed that if the financial adviser would pay the full amount of her loss under the trauma claim, $120,000, and $2,000 as compensation for inconvenience, she would relinquish any claim she might have for compensation in respect of the life policy.

The financial adviser agreed to Sobitha’s proposal and the complaint was resolved on this basis.

 

Insights for participants

This complaint is a timely warning to all financial advisers about the importance of keeping adequate records of your advice. While records may have been desirable in the past, they will be a legal obligation from 15 March 2021. Even if you provide excellent advice, if you cannot document the basis of your advice, you will find yourself in difficulty if a client experiences a loss like Sobitha.

Search case studies