The Association of Financial Advisers (AFA) has issued a statement this week, further clarifying its position on the proposed clawback provisions contained in the new Life Insurance Framework (LIF).
The Association has said it is working to improve specific areas of the LIF proposals, where CEO Brad Fox has singled out the clawback provisions for further attention. He said “… it is clear that advisers share the AFA’s concern over the detail, particularly around the three-year responsibility period for new business.” Mr Fox characterised the current provision as a ‘blunt instrument’, but said it has strong government support as a measure to deal with inappropriate product replacement.
“Three-year clawback for life insurance business which the adviser replaces themselves appears to be acceptable to most advisers, but shifting the burden of responsibility to the adviser where policies lapse outside of their control is unfair,” he said. “Over the coming weeks we will continue to apply pressure for clawback to apply only with replacement product advice and not situations that sit outside the advisers’ control, like a client-directed lapse because of unaffordability.”
… the initial framework lacked detail and that is what we are seeking to influence now
Mr Fox continued, “We are concerned that the three-year clawback not be used to shift an unreasonable burden from the institutions onto small business financial advisers that do the right thing,” Mr Fox said, while also noting “… the initial framework lacked detail and that is what we are seeking to influence now.”
In what the Association sees as another area of concern, it noted the LIF will make it harder for a new adviser to start from scratch, particularly in their own business, if they focus on risk insurance only. It says this is a poor outcome at a time when the demand for advice is increasing.
In noting the level of adverse adviser response to the LIF proposals, the AFA announced lasst week itr would be adding an extra half-hour to its July National Practitioner Ropadshow to give all advisers who wish to do so, the opportunity to to discuss their concerns direct with the CEO and other AFA key figures (see: Life Insurance Framework – Sorting Fact From Fiction).
As noted in last week’s article, riskinfo understands the AFA is looking to conduct another roadshow in the coming months, in addition to the open forum at its National Practitioner Roadshow, that is dedicated to the issues surrounding the Life Insurance Framework. We will provide further updates on this initiative.
The insurance companies and us are in this business together. It would be useful if we could find an accommodation on clawback periods that are less scary for new practitioners.
There is a lot here to consider. For example, right now advisers may be tempted to sell policies that need only last a year – for example massively overselling an annually paid policy. Now we are in the opposite position – adviser may wish to undersell or sell level policies when it is inappropriate sell level policies to reduce renewal shock. However, selling long term level policies is greatly in the interest of the insurers (captive market that later on has to swallow huge price increases and insufficient cover in the early years, i.e. reduced payouts) but often definitely not in the interest of consumers.
It will be interesting how it plays out and I suspect there will be lots of unintended consequences.
One issue that concerns me in the whole LIF imbroglio, is the increasing number of firms who are replacing existing policies at a reduced commission rate on a “general advice” or “execution only” basis. They are essentially piggybacking off the full advice provided by the original adviser, to generate windfall gains and/or new clients to cross sell their other services. They don’t need the full commission amount, because they are not incurring full advice and implementation costs.
As I see it, the new regime will do nothing to fix this problem, but it will penalise the original adviser if the policy is replaced within 3 years.
We have a client who we are implementing life insurance. The premium is around $8,000 annually, and our advice shows that this policy is only required for two years, at which point will no longer be required and therefore cancelled.
Our advice is sound and in line with the client’s requirements however the clawback provision will result in lost revenue even though we have assisted the client in meeting their needs.
These situations may be far and few between, however will still result in an unfair outcome for us.
Glenn, in cases like this, wouldn’t it be better to dial the commission down to zero and charge a fee for service?
Why is it only now the AFA is going to “review” the claw back provisions ?? Maybe the weight of complaints and threats to leave the association have something to do with it ? Really this should have been fought at the origional table of discussion not now when it is only the advisers threats and disatisfaction with their efforts is something going to be looked at What is the answer 2 years ?? That is as bad as three ? Get the ones who do “churn” out of the business but don’t mix them up with those who genuienly assist and have to move a client for cost or some other client requested purpose
Ken
I totally agree with you regarding the pathetic initial and ongoing response by both the AFA and FPA.
Firstly, I’ve seen no organisation (Including AFA & FPA) put a sword to the totally flawed methodology used by ASIC to “justify” the attack on FP’s. Essentially Trowbridge calls himself an Actuary….. well a yr 1 statistics undergraduate would understand the argument put forward was so flawed statistically that the whole basis upon which the synopsis was then formed has to have the same flawed outcome. Hence, BS was used to justify change. That said, if there are some questionable practices undertaken by a few advisers, then hone in on them. That’s ASIC’s job. However nothing, and I mean nothing was done by anyone to address the basis that was used to justify the IAWG. In fact quite the opposite. If you listen to the AFA’s own recordings they in part accept the ASIC finding…… say what? They accept a flawed basis upon which to put forward change? These are bodies representing advisers and no wonder advisers are disillusioned with the response by the above and they have copped so much flack…. In my case I was forced to join one of them due to policies of the Licensee.
The MFAA came out swinging in defense of its members today on a topic I’m not involved in or know anything about. The point is that they were defending their members whereas the same could not be said of the AFA / FPA. They condoned the rhetoric and involved themselves in a process. When they saw the process was yet again set for a pre-determined outcome, they defended their in action. They provided a softly worded “we don’t agree” yet they were tied up with the outcome of Trowbridge which ended up where we are. It has been a farce. They should have come out swinging putting forward the notion that the few samples taken to get to the IAWG situation should have been a more comprehensive and detailed analysis of the whole profession across many licensees and 3000+ sample size.
To highlight the how poor this has been handled. If the medical profession even tried to put forward a new drug without extensive and verified testing with a sample size and analysis beyond repute, then it would see the light of day. Has the process that has been undertaken with initially FoFA then IAWG been anything like this….. nope because no one stood up at the outset and challenged the clowns pushing the changes. So don’t blame Mr Fox et al as they have had to pick up the pieces for the initial inept response. They are however responsible for the current soft approach being taken.
A major culprit in Retail Life Insurance lapses, are the virtually unregulated Direct Product Floggers who themselves have massive lapse issues, due to their erroneous mass advertising based on price with no emphasis on product quality.
They cause most of the retail life policy lapses, not advisers.
If you put a heavily regulated service up against a low regulated service, the heavily regulated service always loses and this leads to massive disruption, job losses, inferior products and in the Life Insurance area, absolutely NIL gain.
The Australian public will continue to be sold inferior rubbish by Direct floggers that will not pay or even if a claim is paid, it is always insufficient to make a difference and will still lead to a huge increase in the Federal Governments spending on welfare when families lose everything.
The 3 year clawback is another nail in the coffin that in 95% of the time, will be a totally unjust and indefensible restriction of trade against hard working, honest advisers and practices that are doing the right thing.
Jeremy
I sympathise with much of your view and agree on many aspects as you put it. I certainly are not an advocate for the flawed methodology used to create the change that has occured. Nevertheless, the key issue however is that you are comparing the sale of a product (direct) with essentially the sale of another life product (by advisers). Advice on the other hand has nothing what so ever to do with product. The big change that many risk advisers are grappling with is that what was done previously won’t cut it in the future. Clients will need to be provided with advice and not product. Product will be the outcome of the advice. This in turn shifts to areas where risk advisers haven’t ventured such as more detailed analysis such budgets, estate planning etc. This essentially means less clients but more high value clients. The reality is that this new regime is going to be enforced on us all…. we either embrace it and change or may I politely put it…. move on to another profession.
I think we are all forgetting the man goals of the LIF:
to increase profits of the major insurers by reducing the number of independent advisers who don’t recommend bank policies and especially AMP policies as they are rubbish. They want us all to go work for the banks and become product pushers instead of advisers.
I am still confused as to how any bank advisers satisfy the Best Interests rule with any advice, be it risk or investment.
The 3 year claw back is unworkable for all independent businesses as any adviser will tell you. That the AFA even considered this as an option shows how out of touch (or more likely compromised due to funding from the banks) are.
Insurance companies have been saying for years that they know who the churners are. They could have done something about it long ago. Change the commission to a hybrid 80-20 split and have a 3 year claw back ONLY if you replace the policy yourself.
These changes will see advisers pushed out of the industry, bigger companies will not look to hire new risk advisers, consumers at the lower end of town will be forced to go to direct insurers who are extremely expensive and don’t give advice and will have to engage a lawyer at claim time, lawyers will take insurers to court and push up premiums, and less competition due to fewer independent advisers will ultimately lead to higher prices for consumers.
Also BDM’s, your days are numbered. no independent advisers makes you redundant. start looking for a new career
Everyone who has any idea can see that these changes will not benefit the client in any way.
Glenn be assured your example is not unusual. There will always be genuine reasons.
Here is a thought. Why cant insurers offer a lesser commission when informed of the short term need. Both parties to act in good faith ( might be a problem for some insurers )
Saves you the pain of lapse under this ludicrous Clawback. Of course, I forgot, it will need expensive System changes, the excuse for everything
Now to the AFA. Please explain why the problems of the 3 year clawback Mr Fox has now discovered were not forcefully raised in the Frydenberg discussions. Why did the Adviser Duet allow themselves to be buffaloed into submission by the banks. Why didn’t they walk out when Frydenberg imposed his TIMETABLE for base political purposes.
And there is still no answer from either adviser group if sponsorship paid any part in the capitulation
Come on Mr Fox – restore some reputation for the AFA. Say it isn’t so !
I have one very simple question regarding the 3 claw back period. If it’s in the clients best interest after a review meeting to move to a new Insurance structure within the first 3 years and I provide them with a statement of advice and meet the BID requirements, why then should I be penalised. The 3 claw back should ONLY apply to general and no advice situations.
I strongly disagree with Mr Fox when he states “Over the coming weeks we will continue to apply pressure for clawback to apply only with replacement product advice and not situations that sit outside the advisers”.
The bottom line being if an SOA has been issued to the client clearly meeting the BID requirements, then WHY should the adviser be penalised for putting the client in a better position?
I would appreciate Mr Fox or any other representative from the AFA to answer.
There are many things disturbing about your post. How is what you are doing any different to what the new framework is trying to discourage?
Interesting comment Shane. What is the new framework trying to discourage? We have a duty to meet the clients Best Interest, not our own. Is the framework trying to discourage meeting the clients Best Interest? I have no problem with clawback for a policy I re-write but to have a blanket clawback for issues outside my control is in no one’s interest but the insurer.
Dan K I was referring to what Matthew posted. I agree on the point about there needing to be flexibility around clawbacks but when there’s an example of a policy being reviewed elsewhere when it hasn’t been in force for very long please tell me that outsiders who are going to dictate the industry aren’t going to look at it with a concerned look?
Could be something as simple as finding an insurer who offers better terms – loadings, exclusions etc which justify the switch. Or what if a product provider upgrades their policy, and now the insured prefers to have the better product with a new insurer.
Although, not common, there are some reasons why an adviser may switch a product early on.
Hi Shane, I understand your comment but the regulators, Govt, insurers & so called client advocacy groups can’t have it both ways. The client is king and assuming all and sundry agree with the Best Interest Duty and it is met – what are they actually concerned about? Churn needs to be defined and surely a reference to BID would be appropriate.
I think this whole debacle has been designed to create havoc within the IFA ranks. To this end it appears to be working, but to whose benefit? There are 3 critical words that need to have written definitions attached to them: 1. Premium 2. Claw-back 3. Churn.
If we don’t have certainty of what premium actaully is ( policy fee, frequency loadings, stamp duty, policy loadings ) then we are leaving ourselves open in the future for different interpretations from different insurers. The cynic in me says “base premium” ( whatever that means ) can easily be reduced so that no matter what % we are being paid, it can be reduced.
Secondly my understanding of clawback in the proposed model is VICIOUS. We need to have exclusions for business or marital breakup, claims, loss of a client to another adviser, to name just a few. If we have an actual definition then we know what we are potentially dealing with.
Churn……… in the 25+ years I have been selling life insurance I have never seen a written description of what churn is. How is it that every man and his dog, including all the experts who have never written a life policy, media, politians, life companies, and even our own assocation leaders can’t produce a definition of Churn. If they did the 99% of decent life insurance writers could simply make sure they keep away from those parameters and got on with providing much needed life insurance solutions to their clients.
I think we are being fed tit-bits of sensationalism to keep us divided and disjointed. If change is really needed to the way commissioned advisers go about their business, then the sensible ( there’s a word that quite a few “experts” need to look up in the dictionary ) path forward would be to address commission first ( structured change over a 5 year period ) and ONLY then look at clawback/churn……….. it would give plenty of people plenty of time to actually research, understand and debate something that could easily destroy a whole generation of good people wanting to be a part of our great industry.
Gregmax…
1. Premium: Agreed. There needs to be clarity on this. One thing that annoys me at the moment when I use life co’s quoting software is the remuneration disclosure.
2. Claw-back: I’d be surprised if a claim is counted. They aren’t now. If a client goes to another adviser after you’ve sold them a policy then are they really the sort of client you want to deal with?
3. Churn: Agreed on your point about churn. Although if the definition was published & agreed to though wouldn’t there be some that would find a way to skirt the rules? e.g. if a policy churned is deemed to be less than 2 years wouldn’t some move it every 2 1/4 years?
Is this before or after we have to complete our PHD’s?
James: Clawback needs to be defined as I am of the opinion that the gloves are off, and I for one won’t be trusting any life insurance company for a very long time. What is currently a fair and reasonable assumption ( regarding claims ) isn’t good enough in future as “trust” seems to have gone out the door. I have had clients leave me…………. funny how it happens to coincide with business difficulties ( refinancing ), and I’m sure it is mere coincidence that the bank also has an insurance arm.
With a definition of churning, and with the current replacement policy disclosures on every application, then those advisers that seem to be “sailing close to the wind” can have pressure applied to them via a variety of sources ( dealer group, life company, professional organizations ( AFA ) and/or ASIC ). Once the issue is out in the open then I believe the instances of oportunists bending the rules to suit themselves will reduce to a managable level. At present we all hear about it, but there are no facts or figures to do anything. All industries have a minority of bad apples…….. ours is the only one I know whereby the solution seems to be to punish everyone.
It seems clear that most advisers are grudgingly accepting the new commission rates even though we know we’ve been stitched up by the insurance companies and banks (the later with their paid “expert” Trowbridge who should be held accountable in the future for the increasing underinsurance problems this will cause with 30% of advisers leaving the industry).
I have to applaud BT who are the first company to openly admit that they will not be lowering premium rates with these changes (are we sure Trowbridge is actually an actuary when anyone with half a brain could have predicted this?).
But none of us except the 3 year clawback.
The AFA have been a complete embarrassment and absolutely useless.
There are a lot of things we can still do from here.
1. Write to the AFA and make it clear that you will not be renewing your membership if this happens. Put them on notice.
2. Refuse to see insurance company BDM’s unless you are paid for the time they waste.
3. Start charging – invoice insurance companies for poor service where this has made you lose money ( I have in the past and guess what, they have paid).
4. Charge more. If you lose a customer because of an excessive price increase by an insurance company above the projections. Send another invoice and charge them for lost revenue.
I think the AFA have one last chance to try and redeem themselves otherwise they should just shut up shop and let advisers sort out the mess themselves.
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