Referral arrangements continue to be a very popular mechanism to promote & distribute insurance products & services.
Where a financial service is only a referral you do not need to hold an AFS Licence.
A typical referral arrangement consists of:
1. informing a person (customer) that a licensee (or its AR) is able to provide a particular financial service; &
2. giving that person the contact details for the licensee or representative.
A simple example is an industry association referring members to an insurance broker or underwriting agency, to meet the insurance needs & requirements of its members.
If the referrer receives any benefits for the referral, these must be disclosed to the person, by the referrer.
𝘼𝙧𝙧𝙖𝙣𝙜𝙞𝙣𝙜 𝙜𝙚𝙣𝙚𝙧𝙖𝙡 𝙞𝙣𝙨𝙪𝙧𝙖𝙣𝙘𝙚
A problem arises, when the referrer is doing more than 1 & 2 above.
They may also:
– assist the customer to complete a proposal/application form;
– display brochures for the broker or underwriting agency;
– co-brand the on-line quote/marketing tool;
– receive a percentage of the commission; or
– offer premium payment facilities.
Some or a combination of these activities may constitute ‘arranging’.
Arranging is a form of dealing & is an AFS licensed activity.
Arranging occurs when a person brings into effect the issue, variation, disposal or acquisition of, or application for, a financial product.
Conduct may constitute arranging if the ‘referrers’ involvement in the chain of events leading to the relevant general insurance transaction, was of sufficient importance that without their involvement the transaction would probably not take place.
Arranging is a question of fact & requires careful legal analysis.
It is an offence to provide unlicensed financial services. ‘Referring’ is not a financial service, ‘arranging’ is. The line between the 2 can be blurred with significant consequences.
𝙈𝙖𝙣𝙖𝙜𝙞𝙣𝙜 𝙩𝙝𝙚 𝙘𝙤𝙢𝙥𝙡𝙞𝙖𝙣𝙘𝙚 𝙧𝙞𝙨𝙠 𝙤𝙛 𝙧𝙚𝙛𝙚𝙧𝙧𝙖𝙡 𝙖𝙧𝙧𝙖𝙣𝙜𝙚𝙢𝙚𝙣𝙩𝙨
There are a number of steps that should be taken to protect everyone involved in a referral arrangement.
1. Conduct due diligence on your proposed referrer – are they of good standing & character?
2. Obtain legal advice & be aware of the guardrails
3. Execute a legally binding agreement clearly setting out what the referrer can & can’t do.
4. Understand remuneration & conflict of interests. Is the payment to the referrer commensurate with the value they are adding?
5. Provide training & support materials to ensure the referrer is aware of & understands the boundaries, the consequences of non-compliance & how to report incidents & complaints
6. Ongoing monitoring is critical, care must be taken that they don’t morph to ‘arranging’
ASIC RG 36 provides information on ‘referrals’ & ‘arranging’.
Contact me if you have any questions.