Latest Poll – Commission Clawbacks

7
Should life insurance policies cancelled in the best interests of the client be subject to clawback provisions?
  • No (85%)
  • Yes (12%)
  • Not sure (3%)

Our latest poll asks you to consider the fairness of the clawback provisions proposed in the soon-to-be tabled Life Insurance Framework legislation (Mark 2).

We appreciate there exists a number of issues in relation to the commission clawbacks proposed under LIF, but for the purpose of this poll our focus is on the proposition that it is inherently unfair for advisers to be penalised for conduct intended to serve the best interests of their clients (see: AFA Pushes For Clawback Exemption on Best Interest Lapses).

When this poll question is posed to a group that mainly comprises financial advisers, it might be expected that the ‘No’ response would garner most votes. For the purpose of balance, therefore, we offer arguments both for and against the proposition.

The ‘No’ Vote

This is the easier argument to advance. The ‘No’ vote is associated with those advisers who believe there is a fundamental ‘disconnect’ that exists if they are financially penalised for doing the right thing, that is, replacing a life insurance policy in the first two years if it is in their client’s best interests.

It can also be argued that the clawback provisions as proposed in version one of the LIF legislation are contrary to the philosophical aims of the reforms as stated by succeeding Financial Services Ministers Frydenberg and O’Dwyer. Both have used language and phrasing in support of the proposed reforms in terms of aligning the interests of all stakeholders, including product manufacturers, advisers and consumers. So, how can financially penalising well-intended advisers who are serving their clients’ best interests possibly come close to ‘aligning the interests of all stakeholders’?

The ‘Yes’ Vote

The ‘Yes’ vote argues that a minority of advisers may seize on such an exemption to generate additional replacement policy activity simply because they will not be subject to commission clawbacks if the ‘best interests’ scenario is invoked.

Another (and related) argument in support of excluding the ‘best interests’ test from clawbacks is the difficulty associated with developing an objective process that can consistently determine whether the exemption submission is valid. In other words, a ‘best interests’ clawback exemption may become an administrative nightmare for advisers, licensees, product manufacturers and regulators.

LIF legislation ‘Mark One’ detailed the current exemptions on which commission clawbacks would not apply:

  • Age-expiry
  • Self-harm
  • Suicide
  • Health improvement

Should ‘client best interests’ become another line in this commission clawback exemption list? As usual, it’s now over to you to continue this conversation. Tell us what you think…

Note to Advisers:

We welcome your comments and in the interest of fairness, request that you properly identify yourself either in your post ID or at the end of each comment.



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7 COMMENTS

  2. I don’t see how anybody could vote yes based on what is put forward by the question. As you state “We appreciate there exists a number of issues in relation to the commission clawbacks proposed under LIF, but for the purpose of this poll our focus is on the proposition that it is inherently unfair for advisers to be penalised for conduct intended to serve the best interests of their clients”. Yet your yes argument picks up on these issues by what is “best interest” or the “minority of advisers who may seize on such an exemption to generate additional replacement policy activity”. So if we aren’t to consider these types of issues but focus on the fairness of the legislation when acting in the clients best interest how can we vote yes.

    • With all due respect to those who voted YES did you really read the question.?
      There are a myriad of reasons that a policy needs to be replaced that are in the CLIENTS BEST INTEREST Not just the obvious ones stated.
      I am sure that we have all encountered something that is “out of the norm” that has resulted in a change being required or a cancellation that no one saw coming at inception that is now out of the control of the adviser.
      The scope needs to be far wider but trying to make a list is futile as these “happenings” will continue to occur for some still unforseen reason long into the future.
      A blanket style effect is required and as stated a review of SOA’s that are “suss” in relation to the purpose of the change investigated. Not by ASIC but the Licensee who after all will also wear the brunt of ASIC if they turn a blind eye to deliberate and unwarranted “churning”

      • Yes I did read the question did you? Did you read my answer? Reading your answer It seems as though you have got the yes and no around the wrong way. When they say “the purpose of this poll our focus is on the proposition that it is inherently unfair for advisers to be penalised for conduct intended to serve the best interests of their clients” they are purely focusing on the fairness. Yes there a number of reasons people could say yes to the question but when focusing just on the fairness the only available answer is no.

        • Sorry Peter Did you vote Yes or NO ? I am asking the YES people how they came to that conclusion based on the reasoning expressed in the question and relevance to yes and NO SCENARIOS

  3. If the insurer wants to clawback commission it should rest with them to prove the cancellation was not in the Clients Best Interest. Where business was replaced a copy of the SoA should be mandatory. Have the insurer read the advice and if they believe not in Best Interest of client let them justify their beliefs and report to licencee/asic. Claw Backs after 12 months should also only apply if the same adviser replaces a policy and they should be done on a pro-rata basis as is currently the case.

  4. The yes vote can be overcome by banning the minority of advisers who regularly churn, from receiving any upfront or Hybrid commissions on those churned policies.

    As to the administrative nightmare, it seems ironic that it was justified by the FSC
    and other parties to negatively impact, or destroy thousands of decent, honest advisers, employees jobs and Businesses they work in, because it may be too hard to work out who is at fault when a policy lapses.

    The current one year claw back, still means that I as the Business owner, are
    responsible for much more than the amount I supposedly received.

    On a basic Best Interest duty client costing analysis to my Business, I am responsible for $2,500 of real expenses in running my Business and fully complying, including paying my staff etc.

    If my Business receives $3,000 then I personally have been paid $500 though I am
    responsible for six times that amount if the policy ceases in the first 12 months.

    I cannot ask my staff to repay their salaries, or for the telephone, electricity and the
    dozens of other charges/expenses to be refunded to me if a client cancels their
    cover and it would be nice if the politicians were aware that we “personally” only receive a small fraction of the income received after expenses come out, to allow us to stay in Business and carry all the risk.

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