Risk Commissions Key Focus of Government Discussions

Financial Services Minister, Chris Bowen, has confirmed that risk insurance commissions will be one of the key issues as the Government consults with the industry on its Future of Financial Advice reforms package.

Addressing an industry function in Sydney hosted by the AFA, Mr Bowen said that full and open disclosure does not make up for fundamental conflicts of interest associated with commissions, whether those conflicts are real or perceived.

But on the question of whether commissions on risk products should be included when other commissions are banned in 2012, Mr Bowen told his audience of 430 advisers and industry stakeholders that he can see both sides of the argument.

On one side is the issue of conflict of interest, but this is balanced against what Mr Bowen sees as real concerns about the potential impact the banning of risk commissions may have on Australia’s underinsurance dilemma.

Following his speech, Mr Bowen reaffirmed to reporters that he has a “…genuinely open mind…” about the future of risk insurance commissions, and this will be a key topic in the Government’s consultation process with the industry, announced earlier this week.

Mr Bowen also remarked he has received feedback that more people will now be seriously considering a career as a financial adviser because commissions will be banned from 2012.

Other key points made by Mr Bowen in relation to financial advice issues include:

  • A clear indication that the Government will not be pursuing the possibility of making financial advice tax deductible.  Mr Bowen said this was a very expensive measure that needs to be justified and that it is not something the Government is considering.
  • There is a place for simple, one-issue advice to be provided, particularly to superannuation fund members, rather than providing all clients with a comprehensive, ‘holistic’ advice solution.  Mr Bowen is mindful of those mums and dads “… who only need simple, basic advice.”
  • The Government is two thirds through its comprehensive superannuation reform package, already announcing measures it will adopt from the Henry Review and Ripoll Inquiry; the final component being the measures that will stem from the Cooper Inquiry, to be handed down on 30 June 2010.
  • Leighroy

    Unlike investments, insurance is a product bought and sold by consumers like any other commodity. Consumers can compare products and premiums for themselves quite easily and advisers selling cover based only on Commission are quickly found out. Should commissions be disclosed on all other commodities – maybe on a car for example, which is a more costly expense over one’s life than an insurance policy? The commission usually has no bearing on the premium or the quality of the cover provided, and these are the more critical issues for the buyer. Paying fees to buy insurance will not be palatable to consumers and they will either then be driven to large institutions, or away from purchasing cover altogether. Neither of these will provide a better result for the consument than the current position.

  • Sue Laing

    I have been watching all these articles and comments over months and am still waiting for an insurer to tell it like it is. The reason they are so silent is that they have to hope this will go away. The implications for them as manufacturers are huge. The manufacturers’ cost-of-acquisition of life insurance under the current model of business is amortised over many years by our esteemed actuarial colleagues. They have not ever, in the retail space, been required to re-price premiums based on nil commission bases and they would struggle to remove this acquisition cost if they were asked to. Certainly any saving to policyholders would be very difficult to apply over the whole life of a policy.
    Have you ever wondered why direct insurance – NO COMMISSION – is often even more expensive than retail, intermediated products (less stringent underwriting aside, there is still acquisition cost of business). Name one insurer who currently has (i) the capacity to dial down commissions fully AND (ii) the capacity to then apply a FULL allocation of that saving back to the client on an ONGOING premium saving basis. Doesn’t exist. Insurers currently all apply a model that sees them making the most gains from such a transaction, not the client or the adviser. Besides, insurers have not got the technological capacity to rejig all their pricing and systems to do this without massive capital investment in mainframe programming – and who will pay for that infrastructure? The end-consumer.
    If all those in favour of removal of commissions (as opposed to rebates, with fees) are expecting the consumer will receive commensurate benefits in return, then they will be very disturbed when the industry has to admit that cannot happen in the way and to the extent expected. Watch this space as insurers are forced to comment on their role in these tectonic changes. The UK industry has had to scramble their way through the massive upheavals forced on them and we have yet to see how their consumers really benefit in effect.
    This discussion MUST enter the debate. Politicians and regulators are not receiving sufficient input of this knowledge about the real benefits (or not) to the consumer, to assist them in their deliberations either.
    This is not an insurance company bash although it might sound like one. I am not envious of their enforced role in this potential change. But they have been thunderously silent on this because they don’t have the answers everyone wants to hear. If we all understood exactly how the future might look for premiums – long-term – in a nil commission environment, then some views might have to be re-visited. Why aren’t we asking these questions and seeking that information??

  • Daniel

    Is it not prudent to leave Risk commissions alone-does the government want the masses to have insurance coverage that they can afford or is the government hell bent on cow tailing to the minority faction again! The Risk market has done far better with less regulation than Super!
    Think carefully we want as many Australians as possible to be insured,for their benefit if we
    derive income from our services what is the issue son long as they have great advice!

  • Daryl La’ Brooy

    Why should risk insurance be treated any differently to general insurance or any other product or service that pays the sales person a commission? One of the arguments that the government and industry funds used against people being charged commissions on super was that it was compulsory and therefore unfair to charge commissions on something that was mandated. Risk insurance is not compulsory and has to be sold. Commissions have been paid on insurance products for hundreds of years. There hasn’t been a problem with this remuneration structure over this period so why change it now? The industry needs to fight this proposal!

  • Patrick

    I think consumers will not be prepared to pay a reasonable fee to cover the compliance burden, (Fact Find, SOA, SOAA, ROA). The advice process is subsidsed by ongoing commission/fees. What is the difference between a fee for service and commission if it is always fully disclosed.

  • milton toal

    Australia has been chronically underinsured since life insurance premiums were made o non-deductible. The cost to the taxpayer pool – and we do pay it – of underinsurance should be explored. My belief is that it runs in the $trillions and destroys lives of those left behind without funding. We need a long-term view and strategy because insurance is very rarely bought. It has to be sold. Banning Agency relationships and requiring all life insurance sellers to be brokers and standardising commission rates might bw worth a serious look.

  • Damian Eales

    Why don’t we all become lowly paid employees of Industry Funds and forget about the client

  • Greg

    So, Mr Bowen has received ‘feedback’ that more people will be planners because of no commissions. What a load of typical, unsubstantiated tripe! Who gave him this feedback? I can’t believe you would even re-print such rubbish and I hope like hell someone at the conference quized him on this. If someone was considering joining the industry, it means they aren’t in it now and would have no idea what they are talking about. That’s like me saying I might join the health industry now that Ruddy has pledged to overhaul it! Go the unions, go the banks. Your’re getting your way.

  • Kevin Weaver

    Re risk remuneration.

    Be aware of the Zealots…

    We have one in Perth, busy on the radio and writing in the West Australian, condeming the way Risk writers are paid and believes that all Life insurances should be purchased through one’s super or apply to a firm in the Eastern states that ” rebates” all commission.
    I know this person and his experience of risk writing, servicing , let alone handling claims is minimal, if any atall.He hates Risk writers and through his hatred, displays such a misunderstanding of the business of writing risk cover, that it is embarrising and harmful. There are many people like this about, beware for they will greatly contribute to the continual underinsurance in Australia.

  • Rob C

    Where then does this avalanche of commission cessation & opportunity of Free Enterprise & choice stop?
    Do then, General Insurers Brokers only receive or charge a higher Brokerage fee & receive NO commission. Do mortgage Brokers, (already discussed), not receive commissions but charge fee’s. The list could go on indefinetly.
    No Financial Planners, General Insurance Brokers or Mortgage Brokers to offer the freedom of choice for a client to consider. You will end up creating a monoply, where the larger institions in there respective fields will ONLY get bigger & swallow up the smaller players. Costs will not decrease but increase over time. DO we not see it now with our Supermarkets? Coles & Woolworths. We pay more in Australia for Australian goods & groceries then our NZ & US counterparts.
    Has it ever been considered that if it were not for the Fin. Planner, Broker actively working for their client,researching & offering the best “DEAL” the Planner/Broker will not get the business. In particular in life insurance ove the past 20 years, products have improved immensley & costs reduced dramatically, for one reason & one ONLY, Life Insurance companies know that if there product is not competitive or cost effective, the ADVISER will NOT offer it. Maybe the rethink should be, the impact loss of our valued services to the country as a whole. Mr Bowen stated himself, the average Australian is under insured & does not instictively go out of his/her way to buy insurance. They are SOLD, by an ADVISER working on their behalf. Take away commissions on insurance, put advisers out of business, where do these people then buy it from? BANKS! Who now own most of the insurance companies as it is. DO YOU REALLY WANT THAT.

  • Brad

    It’s no secret that our Government loves the ‘Woolworths Model’ of monopolised business. This model wiped out bakers, deli’s, butchers, fruit shops, grocers, service stations, liquor outlets, and currently working on pharmacists, newsagents, and hardware.
    We now have 2/3rds less people employed, and prices 5 times what we should be paying.
    This same model will soon apply to the ‘Financial Services’ where the big four banks dominate our market. Sure there will be no commissions, but the big 4 banks will be providing you there ‘home brand’ advice at massively over-inflated prices. Do we not yet understand that when the big 4 gain control your choice is limited to 4 ‘price fixing institutions’ with the full backing of the Government and FPA.
    We have all been rail-roaded into this and there is no way back. The consumer gets ripped off yet again. Good on you Rudd. Spent all our savings, stopped the mining boom single-handedly, and now working on stuffing up Financial Services. Genious

  • Mark Smith

    I think the whole conflict of interest issue is BS. The risk industry is the easiest to remove any conflict from by doing the following:

    1. Remove APL restrictions and force all dealer groups to allow advisers access to all players in the market.

    2. Ban commission overide payments to dealer groups based on volume. Maybe that will force some groups out or adviser splits up, who knows.

    3. Place a longer responsibility period on the cover, only for re-writes to another company and not client cancellations.

    I also agree with Sue Laing’s comments and extend them by saying I believe consumers will turn to large companies offering general advice. I also believe that any savings made on commissions will not be passed back to consumers. The same thing will happen once trail comms are removed, I will be surprised if admin/management fees for investment products will be reduced for new investments.

  • Stuart Banner

    Note to the FedGov. You have NO role is legislating on perception, only reality.
    This rectoric is getting rediculous!

  • Bradley

    I keep reading about conflict of interest, putting someone into 1 product in order to earn more revenue/commission.
    If they are going to change something in the insurance industry, why don’t they get all insurers to pay the SAME %, therefore removing the bias ????
    How can people afford to pay the premium and a fee for insurance ????
    Insurance is very different to Investments and Superannuation which can increase in value, and have the fees debited from the portfolio.

  • Annoyed

    Bowen obviously has too much free time !

    He would be better served understanding our industry rather that listening to the industry funds B.S.

    Who’s more biased ????

  • Peter

    All the above comments are well received and true. It is all directed so industry funds and banks win this battle. Who will lose, the clients of course, with crap products from employed people who have no idea what they are doing. Bowen is has no idea of this industry and his leader, Mr Rudd is a goose out of control.

  • Walter

    The balance Mr Bowen is wrestling with is not whether to ban commissions on insurance products, which is unconstitutional anyway, versus the underinsurance gap. But to balance attempting to direct insurance to industry funds (for more profit to Unions/Labour/G’ment)and whether the underinsurance gap will widen therefore costing government more. We all know that if salaried people are selling insurance they are not rewarded for insisting on the correct amount of cover for clients as well as follow up in underwriting medicals revised terms etc, they will drop the ball and Australia will be REALLY underinsured. You Watch they want the profit!! It’s time these meddlers were booted out.

  • Greg

    Why is it that this government, so deparate to raise taxes, want to direct more of the financial services industry into instituations that don’t pay any tax? Not for profit does not mean don’t make a profit – it means get rid of it. Lets sponsor some football teams or send our executives on first class overseas junkets. Imagine if the $1.3trillion (and growing)industry was all in the hands of industry funds. The country would get a great return, wouldn’t it. At least the banks pay tax!

  • Kenn Williams

    Dear Mr Bowen.
    Given the record of your Government in many policy and funding areas, I am afraid that I do not take any confidence from the comments attributable to you.
    However, what I can tell you is that my business has 10 staff,we have 15 years of commitment to this industry and we have invested heavily in securing both the futures of our staff and the relationship with our thousands of wonderful clients.
    Which leads me to ask how you intend to consult with those at the coalface in order to formulate the future of my industry, and the future for my staff and clients.
    If it resembles the super tax mining industry negotiability, I hold grave fares for the
    Can you please advise, in exact deail, how you propose to manage the issue.
    Records to date do not create any confidence whatsoever.

    Kenn Williams, Lifenet wa.

  • Michael Mooney

    I applaud Sue Laing for her overview of the situation and would add that the industry as a whole has to quickly phase out up-front commissions in favour hybrid or level as as a consequence, reduce churn. Will the life insurers tell us what the impact on premiums would be if discontinuances were less than 5%

  • RLewis LRS

    Anyone suggesting to the minister that they would join the industry based on current reforms is going to be sadly disappointed. The financial planning industry is almost entirely a sales distribution channel for product groups.

    Qualifications above the minimum 4 module Certificate of Financial Planning are currently not needed as only product sales skills really matter.

    The only opportunity to work outside of the product groups or product sales targets is to invest personal capital to cover compliance, group licence and other start-up costs. Meanwhile the market is skewed in the interests of the product groups who can give free/subsidised advice.

    The minister has got it completely wrong. The opportunities for current and would-be financial advisers are looking increasingly dismal, especially anyone wishing to be professional or advice focussed.

    Long live the commissioned risk advisers who are the only ones in this grubby industry who deserve to hold their heads high. Let us all hope that commissions on risk insurance remain intact.

  • Mike, an adviser with over 20 years experience

    In outlining the Federal Government’s so called reform package “Future of Financial Advice” the Minister has demonstrated his total failure to understand the financial services industry and the function advisers perform in the community; just another example of Rudd Government abysmal incompetence in again getting it wrong.

  • Jeff

    I am a proud risk writer of 20 years experience and run a country Risk Insurance Practice. I help my clients analyse their position,I give recommendations to help them solve underinsurance problems and I help them in time of need. Do I get an initial commission payment & servicing commission payment- to right I do as this is the only way most of my clients would like to do business or could afford my advice/ongoing service. Mr Bowen, here is an invitation for you. I offer you the opportunity of coming to my office and spending a day in the car with me(or more if you like)travelling around talking to my clients. Don’t listen to the BS coming out of certain parts of our industry, and especially those people who have never sat infront of a injured client or a person whose just lost their spouse. Come and talk to a real “risk writer” who deals with mums and dads on a daily basis and come and meet those people I am supposedly “ripping off” by charging a commission. Do I believe you will take me up on my offer- not a chance as I believe you are not interested in hearing the real story. You say underinsurance is a problem in Australia- banning commissions will now just make it worse.
    My competition as a Risk Writer should be making sure I beat death, injury & tramatic events for my clients- not having to try and educate and compete against a govenment that should know better.

  • Rob

    Is there anyone in Australia who has sold an insurance product or had a claim paid to a Politician?

    If so please ask them if there were any problems with you receiving a commission payment?

    In 34 yrs I have NEVER had anyone who has made a claim complain about me receiving commission!

  • CP

    Oh Dear! Smells, feels and looks like change for the sake of change.
    Do the members of this Govt have a clue about any portfolio at all?
    On one hand they wish to sell the Australian Financial Services to the world, on the other they want the entire sector to live on welfare…. we won’t be able to pay our own premiums.
    To think it gives me enormous pleasure providing valued advice for clients to ensure their family is financially protected in the event of medical misfortune… Guess the Govt can just hand out payments when their business falls over or they lose thier homes… Govt money is treated like a bottomless pit after all. Not that it will matter as the client won’t need a bed, they’ll be sitting in hospital waiting rooms waiting for public treatment!

    Must be Friday afternoon 🙂