Concessions on risk commissions in superannuation have been balanced by extending a ban on soft dollar benefits to include life insurance outside super.
These changes and other details have been announced today at the release by Financial Services Minister, Bill Shorten, of the first tranche of the Government’s Future of Financial Advice (FoFA) reform legislation package.
Key elements impacting the life insurance sector include:
Risk Commissions in Super
Risk commissions under FoFA will now be allowable on individual life insurance policies written via superannuation choice products
An easing of the Government’s position on banning all risk commissions in superannuation. Risk commissions under FoFA will now be allowable on individual life insurance policies written via superannuation choice products and self managed superannuation funds.
(The Government defines superannuation choice products as where a member has made a choice that their superannuation would not be in MySuper or their own SMSF.)
Churning
In its reference to treatment of insurance commissions, Mr Shorten said the Government will work with industry and consumer groups to introduce uniform “claw-back” provisions to remove the incentive for some advisers to shop around for the most generous claw-back arrangements.
Mr Shorten added that imposing level commissions on replacement polices was an effective way of addressing the issue of churning and that the Government will work with industry and consumer groups on the most effective way of implementing this reform.
Ban on Soft Dollar Benefits
An extension of the ban on soft dollar benefits to include life insurance outside superannuation (following further consultation with the industry).
Opt-in
Confirmation that opt-in regulations will be implemented as previously outlined, but which are intended to include significant flexibility. This flexibility includes:
- Raise the matter in face to face meetings
- Electronic channels such as phone or internet
- Potential use of an electronic record of advice to record the renewal. For example, the client could fill a short form online and click a “send” button (that sends the email)
The Government has noted a report from Rice Warner Actuaries, which it says estimates the cost of opt-in will be approximately $11 per client: “Opt-in won’t create a significant new impost for advisers who are in regular contact with their clients,” Mr Shorten said.
Best Interest
Best Interest regulations will apply. The maximum penalty for breaches of Best Interest obligations will be $250,000 for individuals and $1 million for corporate entities.
Grandfathering
Following legal advice, Mr Shorten says the Government has determined that the ban on conflicted remuneration (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions.
The first tranche of the draft Bill covers a number of key components of the FOFA reforms, including:
- Opt-in
- Best interest duty
- The increase in ASIC’s powers to enforce the new elements of these reforms
The second tranche, intended to be released shortly, will include:
- The ban on conflicted remuneration (covering commissions and volume payments),
- The ban on ‘soft dollar’ benefits
- The ban on asset-based fees (where there is gearing),
- The definition of intra-fund advice
Click here to read the Government’s press release and background material.
Click herefor the Exposure Draft of the first tranche of the FoFA legislation.
The Government says interested parties are invited to make written submissions on the draft legislation by 16 September 2011.
Once again we have a Government that is making decisions that will do the opposite of what they are trying to achieve.
For instance,churning and best interest requirements.
Having a $250,000.00 fine for advisers if they breach the best interest of the client and at the same time, force advisers to say to clients, sorry we can not afford to do a full review of your situation, as the government has banned us from receiving commissions commensurate to the time it will take to comply with the regulations and Insurance Company requirements to increase your cover.
The Government getting involved in the discussion and trying to regulate commissions,
is contravening the best interest regulation, in that advisers will not be able to do their job, which is to review and make appropriate recommendations that are in the best interest of clients.
If it takes 8 hours to do a full review complying with onerous red tape and the remuneration is a fraction of the cost to provide it, where does that leave the adviser?
Why is the Government getting involved in what commission a company pays?
If the self interest groups get their way and it leads to upfront and hybrid commissions being banned and only a flat rate is permitted, can anyone tell me how we can provide a best interest service for our clients if we spend 8 hours doing a full review and finalising the mind numbing requirements, to then receive less than a quarter of what it costs to provide this best interest service.
If advisers can reduce the time it takes to comply by 75%,then we can afford to get less commission to do the work.
However we are caught between the Lawyers, the actuaries, Government beurocrats, Industry super funds who want to destroy the advise profession and Insurance Company red tape and time cosuming administration that wipes out our ability to do our job in a time efficient manner.
One of the labour party politicians has been shown to be quite “dodgy”. Does this mean that all politicians are no longer allowed to be paid fairly for the work that they do? As well as file note every conversation they have with anyone about anything, and put in writing written warnings signed off by the other party about every possible outcome (positive and negative) about every thing they are fully qualified to advise on?
The changes coming are never going to be 100% satisfactory to all concerned. Just remember that FSRA had several drafts and took a full 5 years to eventually implement. If Craig Thomson is forced to resign, we’ll get a short term reprieve. Advisers should keep communicating their concerns to their local member and to Bill Shortens office in response to this draft. At least you can say you tried to have a say on the outcome.
Well said Jeremy Wright!
Industry research indicates churning (a hypocritical term used by the banks) is not a major issue. The issue of course is fundamental that insurance companies look and project long term our clients look at the now and short term. It therefore follows we must put together and present solutions based on their needs and do it regularly, thoroughly and researching all the new products and rates these same insurance companies develope. This is all about saving money due to losses the huge increase in lapses from 12 to 36 months has caused due to the current financial crisis and people doing it tough. People do it tough, insurance is one of the first to be cut! So this is about bank owned insurance companies looking for a solution to clawback as much commission as possible in the first 36 months if it lapses.
Churning is just the excuse they are using.
Shorten’s comments are a bit rich when his own government is demanding the banks allow customers to ‘switch’ mortgages between banks with less hassle and cost but in the insurance industry he wants restrictive business practices?
The general insurance industry can actually offer incenives to change.
Back in the day we had the twisitng rule and it was a complete restrictive trade disaster. If still in place Whole of Life and Endowment policies would still rule supreme! Thank goodness Australian Eagle came along with a Universal Life policy (splitting term and investment into their components) and a whole new industry was born.
Don’t be fooled look through the looking glass and ask ‘who wins and who loses in these changes?’
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