May 14, 2018
The financial services industry has rallied around the ongoing use of life insurance commissions as they currently stand, stating the changes brought about under the Life Insurance Framework (LIF) should be given time to take effect.
The AFA and FPA, as well as AMP and three major banks have each maintained that life insurance commissions should remain at current levels and any further changes may increase the cost of life insurance and the cost of associated advice.
The Associations and institutions made the statements in response to open questions presented at the end of recent hearings into financial advice at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (see: Royal Commission Will Consider Life Insurance Remuneration).
Parties that had leave to appear at the Commission were asked to make submissions on a range of topics including life insurance commission with Senior Counsel Assisting the Commission, Rowena Orr QC asking, “Should the statutory carve-outs to the ban on remuneration, including the recent carve-out in relation to insurance commissions, be maintained?”
In its submission, the AFA stated “We have not seen any recent evidence that would support a ban of commissions on insurance and would suggest that in the absence of this evidence and a comprehensive review of the consequences, that this should not be proposed”.
The AFA added the LIF changes had only started on 1 January 2018 and “…to the extent that these changes were felt necessary by the Government, we certainly see no need to make further changes until there has been the opportunity to assess their effectiveness”.
“We have not seen any recent evidence that would support a ban of commissions on insurance…”
The submission also pointed to ASIC Report 413 highlighting that it showed the current hybrid form of upfront commissions delivered a 93 per cent compliant advice outcome, and instead called for regulatory action against advisers who were inappropriately replacing product.
“Generally, the insurers know which advisers are inappropriately replacing insurance and therefore direct action can be taken against them rather than looking at further reforms to commissions that will unnecessarily impact client access to insurance advice and the viability of insurance specialist advice businesses,” the submission noted.
The FPA also called for the maintenance of the current commission arrangements and for ASIC to review the success of the implementation of the LIF regime before any further changes were considered.
In its submission, the FPA stated “that changing remuneration on life insurance advice will unfairly impact small businesses who are unable to cross subsidise advice costs across services” and that advisers were necessary to educate clients on the risks they faced with and without life insurance.
Despite this, the FPA was open to the eventual removal of commissions, stating “…there is a need to develop a strategy and a long-term timeline to put in place appropriate steps to resolve current issues and lead to the removal of life risk commissions in the future”.
AMP, in its submission, stated the carve-out remained appropriate and the issue of life insurance commissions “…was recently revisited by Parliament through the Life Insurance Reforms in 2017, which commenced on 1 January 2018” and “…AMP supported those reforms”.
Meanwhile, ANZ highlighted the issue of the affordability of advice stating, “…the legislative policy underlying the continued permissibility of life insurance commissions was that insurance advice would otherwise be unaffordable for some. The Commission has not received evidence as to what, if any, increase in the cost of life insurance (and other) advice may result from prohibiting life insurance commissions”.
“…the present commission payment methodology spreads the financial adviser cost to the client over the life of the policy…”
Westpac stated in its submission that it “…does not consider that remuneration based on upfront and trailing commissions necessarily leads to poor client outcomes” where appropriate compliance measures, commission disclosure, and management of potential conflicts were put in place.
Westpac also noted the current commission regime best handled the costs of advice associated with placing life insurance and “…the present commission payment methodology spreads the financial adviser cost to the client over the life of the policy – that is, the client is only required to pay the same premium every year, but the adviser is remunerated for his or her work upfront in establishing the policy”.
NAB stated there was “…insufficient evidence before the Commission to make a definitive recommendation as to whether each of the statutory carve-outs to the ban on conflicted remuneration ought be maintained”, adding the LIF reforms considered the risk of underinsurance and ASIC’s review of the reforms should be considered when making a decision.
Calls for No Commissions
Of the 17 parties who made submissions, two called for the complete removal of all commissions with Choice and the Financial Sector Union (FSU) stating the LIF changes are an improvement but have not fully removed all conflicts of interest.
In it submission, Choice stated “…the reforms are an improvement from previous arrangements, however, they do not remove the conflict, they simply make it slightly less profitable”, adding that ASIC should use its regulatory powers to introduce a timeframe towards the removal of life insurance commissions which would allow advisers reasonable time to develop new revenue streams.
The FSU stated it supported the Future of Financial Advice reforms and remained committed to the removal of any carve-outs around conflicted remuneration in all areas of financial advice but also recognised the need for advisers to be appropriately remunerated.
“The Union submits that in the event there is a further move away from commissions, there must be a corresponding adjustment to remuneration of employed financial advisers. It is neither fair nor appropriate for advisers to bear the adverse effects of any such change. To this end, a focus in fee for service based on hourly rates should be endorsed.”