Tan Kin Lian's Blog: Big professional liability risk

Thursday, January 27, 2011

Big professional liability risk

Financial advisers are not aware that they face a big professional liability risk. They are selling large life insurance policies to high net worth individuals, without explaining the distribution cost (more than $100,000) or the effect of deduction (more than $500,000).

When the customer learns about these huge charges at a later date, they are likely to engage a lawyer to sue the financial advisers for negligence. It will be easy for the lawyer to prove that the financial adviser had failed to give proper advice, or worse still, had deliberately withheld relevant information or misled the customer. The damages could be large and the legal fees will add to the damage. One strong argument is that the financial adviser had breached the code of ethics and professionalism.

The financial adviser will not be able to hide behind the excuse that "they are disclosed in the benefit illustration". It is the duty of the financial adviser to explain these key points to the customer, so that the customer can make an informed decision. The failure to provide the proper explanation will be taken against the financial adviser - who has a fiduciary duty. The insurance company can get away by saying, "we rely on the financial adviser to give proper advice to the client" but it will be difficulty for the financial adviser to escape the liability.

It is likely that some lawyers may take the case for the consumer on a special understanding, similar to a contingency fee arrangement. When this type of arrangement is made, it is likely that many cases will be taken up. Financial advisers should be careful about their role, or they can be easily bankrupted by a few of these legal suits. The days of lax supervision and non-accountability may be over.

Tan Kin Lian

10 comments:

Vincent Sear said...: Call me sceptical but, I think the KYC/FNA is not to protect the client, it's to protect the agent and insurer. As long as a client signs it, whether option 1, 2, 3 or 4, the agent and the policy issuer are legally high and dry.

The argument that a client didn't understand what he signed cuts no ice at the court of law as seen in the minibond crisis, unless he can credibly prove illiteracy.

An insurance proposal (whether traditional or ILP, RP or SP) comes with the requisite medical and financial questionnaires, BI and PS. These should be sufficient when explained and understood.

KYC/FNA only allows tied agents to masquerade as personal financial planners to look more impressive, and revealing more on KYC/FNA can actually be detrimental to the client, for the agent knowing more will try to sell more.

There's no such thing as a personal financial planner even if he comes with CPF or ChFC titles as long as he's a tied agent.

KYC/FNA should only be allowed in non-commission planning based consultation by qualified independent advisers. It should have nothing to do with product issuing companies too. They're just product providers. It's a confidential matter between client and real adviser. The adviser and his firm should have their own KYC/FNA and advisory process and build their own reputation.

However, that's an idealistic view too, I admit, as most life insurance products are still actuarially loaded with high upfront commissions and even supposedly independent advisories have to face this fact of life, unless MAS is willing to step in for another round of rehaul.; January 27, 2011 9:33 PM
zhummmeng said...: It is very easy to sue insurance agents. Just look in the fact find forms for all the evidence of mis-selling.
9 out of 10 product pushing salesmen leave a lot of self incriminating evidence and breaching the section 27 of the FAA is one. Circumstantial evidences are abound too.
Yes, all is needed are contingency fee lawyers who are willing to gamble against the insurance companies...it is a gold mine out there for lawyers to sue insurance agents.; January 27, 2011 10:05 PM
Tan Kin Lian said...: Reply to Vincent Sear,
The financial adviser may think that they are covered under the Know Your Client or Financial Needs Analysis forms. But so far, no case has been tested in court on professional negligence.

If a case is brought to court, I believe that the court will hold a higher standard of advice that is needed from the financial adviser and will hold them to be liable. Te risk is high.; January 28, 2011 6:00 AM
Tan Kin Lian said...: There is a difference between the mini-bond case (where the financial adviser does not know the complication), and a life insurance policy (where the financial adviser knows that the high charges are bad for the customer and does not tell the customer). The financial adviser has a duty to tell the customer.

There are many cases in the UK where the financial adviser is found by the Financial Services Authority to be acting unethically and the FSA imposed a heavy fine on the insurance company for failing to supervise the agents.; January 28, 2011 6:04 AM
Vincent Sear said...: UK has an independent financial advisory firm culture since the late 80s and early 90s when par policies collapsed. Insurance companies were issuing 101% unit-linked policies to qualify as insurance products long before MAS imposed 125% SA minimum for insurance companies in Singapore.

Most of the traditional life insurance co-operatives in UK (known as societies) and in US (known as mutuals) were taken over by commercial corporations during those years when yields collapsed.

Yes, in Singapore, no case of insurance mis-selling has been tested in court yet. My sentiments would be with the victims with bona fide cases, i.e. ridiculously expensive products that no sane person understanding it would have paid for it if not mislead.; January 28, 2011 9:34 AM
zhummmeng said...: In the court of law the customers are viewed as clueless and the insurance agents are considered financial experts.
It is a correct assumption. Signature is not proof that the customer signed knowingly and it is well known that people sign blindly.Circumstantial evidences can verify.
EG. who initiated the meeting, ie the customer called the agent or the agent prospected the customer.
If the customer called the agent there is assumption that the customer was savvy and knew what he needed and therefore NO fact find or analysis is required , option 3 could be justified although not necessary true because if the enquiry wasn't of specific product but general.
If the agent prospected the customer ...fact find is definitely required and if option 3 was ticked then the agent is potential defendant.
This is one of the many circumstantial evidences MAS will use to determine the case of mis-selling.
Although it is well known that insurance is SOLD and NOT bought insurance agents still make customers tick option 3. If this can be proven by circumstantial evidence that the agent conned the customer into ticking option 3 the agent 's motive is suspected, eg conning the customer to buy WL and it also proves that the customer is clueless and is taken advantage by the agent.
Wait for the new law to come soon.; January 28, 2011 10:43 AM
Concerned said...: The insurance agents/financial advisers do not have the deep pockets to pay off any damages arising from any legal action taken by the customers. Example, a financial agent has sold 50 policies of the same kind that is being sued by a customer and the financial agent has two private properties. Assuming the customer won the case, other customers sold of the same policies will join in the action. Assuming those two houses are being sold to pay off those 50 customers. How much will each customer receive, after paying off the legal fees? In view of this the financial agent will continue to sell the same type of policy knowing full well the potential risk liability that may arise, after all they have to make a living from the commission earned. Are financial agents require to take up a professional indemnity policy to cover themselves of potential risk liability? Only the insurance companies has the deep pocket to meet the potential risk liability and a way must be made to ensure that insurance companies are liable for the actions of their agents, after all it is the insurance companies who create/churned out those policies. Mr Tan you mentioned that "The insurance company can get away by saying, "we rely on the financial adviser to give proper advice to the client" So a way must be made to connect the insurance companies to the agent liability. That only the authorities, MAS or insurance commissioner can do that.; January 28, 2011 4:10 PM
zhummmeng said...: The principal and agent law provides that both are liable,ie you can take legal action severally or jointly. The principal is liable for the misconduct of the agent.
Usually, sue the principle and let the principle sue their agents.; January 28, 2011 6:41 PM
Vincent Sear said...: If a client called the agent to buy a policy, it should be Option 4. If an agent prospected a client promoting a policy, and the client buys it without wanting any advice further than the policy itself, then it should be Option 3.

Option 3 is really the norm and and the truth, like it or not. If it goes up to Option 2 or 1, then I worry for the client's misplaced trust. He's telling the agent too much for the agent oversell.

Whatever it is, as I've said before, I don't believe tied agents or even commissioned brokers can do real independent personal financial planning, even if they're CFPs or ChFCs. They'll peddle their own companies' products or the highest commissioned products.

The most likely Option 4 case is a client who calls up an agent to buy a term policy. Low commission as it is, the agent will of course take the business as it's really an easy job of order taking.; January 28, 2011 6:54 PM
Soojenn said...: KL, nice of you to share this insight and providing this informative article.

Does "not explaining the (high) distribution cost or effect of the deduction" constitute that the financial advisor is failing to give proper advise.

Why do you think that it is easy for the lawyer to prove that the financial advisers failed to give proper advise, had deliberately withheld relevant information or misled the customer. As you mentioned, the financial advisors have the tendency to claim that "they are disclosed in the benefit illustration" and there is a cooling period.; January 30, 2011 12:41 PM