An alarmist approach on the Financial Services Act 2013

Three months down the road, the situation hasn’t changed much. I was told me a few days ago that the life insurance companies in Malaysia are still taking it easy with regards to the Financial Services Act 2013 which had come into effect on the 30th of June this year. One fellow in the industry told me that very few insurance companies have yet to inform their policy owners about the implications of this FSA2013, which is very true because, as fair as I am aware, only MCIS Zurich has bothered to send letters out.

To compound the lackadaisical attitude, some insurance agents have been going around to tell their clients and prospects that the FSA2013 would affect only new policies and not the old ones which were purchased while the Insurance Act 1996 was still valid.

(A more preposterous story heard earlier what that an agent claimed that the FSA2013 would not affect him because his insurance company had not informed him about it. This is just like the three monkeys who see no evil, hear no evil or speak no evil, but the evil is there all the same.)

The problem with this misinformation or half-truth is that their clients are deceived into believing that nothing had changed and everything was still all right with their policies when in fact, they will hit certain obstacles later when they try to do a few things with their policies.

I have written about this earlier that one of the effects of the new Act would mean that a policy owner is no longer the trustee of his own policy, assuming that he had bought the policy before 30 June 2013 when the IA1996 was still in force. Of course, if you buy a policy now with the FSA2013, you simply cannot be your own trustee. At the risk of repeating myself, let me expand on this.

If the policy owner had bought a policy then, and nominated his spouse, child or parents (if there was no spouse or child at the time of purchase) as the nominee or nominees under Section 166 of this IA1996, he would have created an insurance trust with himself normally appointed as the trustee of his policy.

Under Schedule 10, paragraph 5(3) of the FSA2013, this trustee appointment is now invalidated. If he was the trustee then, he cannot remain as the trustee now. So who can be the new trustee of his old policy (or trustee of his new policy under the FSA2013)?

The FSA2013 lists down three classes of persons who can be the new trustees of an insurance policy, in order of priority.

1. The first class are the competent nominees in the policy. For example, the spouse and the adult children would be considered as competent nominees. Children below 18 years old would be incompetent nominees.
2. The second class are the parent of incompetent nominees. For example, if the only nominees in an insurance policy are all minors, then the other parent of these children will be next in line to be the trustee of the policy.
3. And the third class is the Amanah Raya Berhad or an appointed trust company such as Rockwills Trustee Berhad. It used to be that Amanah Raya Berhad was the sole choice if there are no parents and the children are minors, but with the FSA2013, well, there is now a choice.

I’m not going to say much about what paragraph 5(3) of Schedule 10 of the FSA2013 means to our insurance policies but I believe all of us who have bought insurance before 30 June 2013 must ask ourselves these questions and have them answered satisfactorily:

• Does the policy owner know who is the new trustee of his insurance policy?
• Does the policy owner trust this new trustee enough to use the money for his beneficiaries?
• Does the policy owner have control of the appointment of the new trustee?

I am saying this because the policy owner have to understand when consent is needed from the new trustee and when consent is not needed. For example, there are certain circumstances which still do not require the new trustee’s consent when a nomination is changed. I shall talk about this in tomorrow’s post. However, his new trustee’s approval is clearly needed if the policy owner wants to vary the terms of his policy; if the policy owner wants to surrender his policy, he will also need his new trustee’s consent; and if the policy owner wants to assign his policy, he too must seek his new trustee’s consent.

Normally I would assume that there should be no problem but if the new trustee (spouse or adult children) happens to be away for a considerable period – on holiday perhaps, or is now working overseas, or cannot be contacted, or senile or even dead – how long is the policy owner prepared to wait for resolution?

You may say that I am an alarmist but the fact remains that all of us should be well wary of Murphy’s Law which suggests that “if anything can possibly go wrong, it jolly well will go wrong.” Yes, we may get caught up in it one day, and then it will be too late for regrets.