Inconsistent LIF Regulations Create Loopholes

The draft regulations for the Life Insurance Framework legislation need further clarification, according to a lawyer operating within the financial services sector who has claimed the regulations create loopholes around clawback and conflicted remuneration.

Imac legal and compliance Principal Lawyer, Ian McDermott

imac legal and compliance Principal Lawyer, Ian McDermott

imac legal and compliance Principal Lawyer, Ian McDermott said inconsistencies in the treatment of clawback may allow advisers to circumvent the rules by rebating clients to retain their policies.

“It appears possible the clawback provisions may be avoided by merely engaging in an ongoing program of ‘rebates’ to clients, no matter how minimal the rebate so long as the rebate was applied in order to induce the client to acquire or continue to hold, the product,” McDermott said, in a blogpost on his company’s website (available here).

“The new LIF rules still allow this as well as where a ‘discount’ is applied to a policy for the same purpose,” he said.

“The LIF rules contain clawback provisions but give no regulatory guidance as to how those rules are to apply…”

He was also critical of the failure of the draft regulations to provide clarity around how clawback would apply when there had been a change of adviser or licensee between the commencement of a policy and cancellation and clawback.

“The LIF rules contain clawback provisions but give no regulatory guidance as to how those rules are to apply…The new rules do allow for ASIC to make rules that could cover such requirements so let’s hope they do spell out the requirements,” McDermott said.

“However, in imac legal’s view, given this is such an integral issue, appropriate rules should have been included in either the Act or Regulations.”

McDermott also said the application of conflicted remuneration was ‘anomalous’ in the regulations with commissions paid to advisers under the new upfront/ongoing commission model not considered as conflicted remuneration while commissions paid in relation to life insurance without advice would be considered as conflicted remuneration even when they fit within the new commission model.

  • Alleycat

    Mr McDermott, I don’t know what planet you’re on but you certainly aren’t on mine here on earth.
    99.9% of advisers promote a contract based on the client need, and the contract benefits that will look after a clients financial well being,….. just in case.
    The maximum client rebate available to clients taking out insurance with a Nil commission payment to an adviser is a 30.0%.
    Rebating even say 25.0% of commission to a client to retain a policy offers no guarantee to any adviser.
    Here’s why.
    If a client is so predisposed not to keep an insurance policy because their circumstances have changed, such as divorce, unemployment, or better options are available via new employment, then no amount of rebate is going to keep that business on the books.
    I, for one don’t get it and your comments seem less than valid under the circumstances.

    • James

      I don’t think he’s talking about rebating via the policy (which can’t be done once a policy is already in force).

      This covers the situation where a client might call the adviser 6 months prior to the 2 year clawback window.

      Adviser then agrees to directly rebate (from their own business) $500 to the client, if they agree to retain the policy.

      In many cases that $500 outlay might be much cheaper for the adviser than copping a 100% or 60% clawback on the cancelled policy…

      • James

        Having clawback stepped down on a monthly basis (e.g. A cancellation at 21 months would incur a 3/24ths clawback) would certainly avoid some of those examples above.

  • josh

    if

    • josh

      if only I became a politician. Free helicopter rides, chauffeured cars, travel perks and endless entitlements all unaccounted for.

  • Alleycat

    @ James,
    First off I’ve only been in this business about 38 years and I’ve never ever had a policy cancelled/lapsed within 2 years of issue.
    Yes, sometimes clients like architects have cashflow problems, if their monthly premiums are sizeable enough over certain periods of the year, like December/January/February when the building industry tends to shut down and go on holidays.
    The 100.0% clawback within the first 12 months has been around probably more than 20 years. What hasn’t been defined in the legislation is why should an adviser be penalised after 12 months if the client becomes unemployed, goes through a divorce or simply has identical cover (in a sense) provided for, under an employment agreement.
    These are things, advisers have absolutely no control over.
    You have to wonder what other industry has to repay 60.0% of what they earned after 23 months if the client terminates the arrangement.
    To me it’s just a money grab by the Life industry and therein lies their lack of morality.

    Perhaps your suggestion that after 21 months 3/24th are repaid but is it 3/24 of the original premium (viz 80.0%) from day one or a %age of the commission due, based on the 20.0% per month renewal premium.
    I might be wrong but my understanding is that if a policy lapses/cancelled, the new LIF says 100% of the first years commission is repaid, if it happens within 12 months, and 60.0% of the total commission is repaid, if a policy lapses or is cancelled in the 2nd year.
    Who works for 23 months and then has to repay 60.0% back of all they earned over that period.

  • James

    @Alleycat

    Agreed. It’s pretty obvious the insurers have been allowed to dictate the numbers, otherwise logically the 2nd year clawback would have been 50%.

    The monthly step-downs make much more sense (a couple of insurers already do this), but you’ll also have circumstances where a client goes from a trade to admin work, necessitating a re-rating and new comparison across the various providers.

    Unfortunately, if that happens in the first 12-24 months, the adviser gets no (or marginal) reward for having to prepare a new SOA and doing what is in the clients’ best interest.