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Industry Backs Life Insurance Commissions

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?”

The Associations

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”.

The Institutions

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.”

  • GuyM

    One argument I am yet to hear put forward is that the banning of commission on life insurance will destroy competition in the sector. Advisers who have a duty of care to their clients are always trying to find better ways to serve those clients and that includes appropriate upgrades.
    I was recently introduced to a lady who was paying around $2,400 for substandard life and TPD through her industry fund. We sourced the same level of cover (with much better terms) for less than $1,600 which I was happy to arrange. Competition at work.
    Under a nil commission arrangement I would have had to ask for $3,000 up front + fees for any additional work through the years to save her $1,000 a year? Most people will be reluctant to go down that path.
    And her husband who has a loading is being coaxed through the system to try for a better outcome. It’s in the balance but I’m willing to see what I can do via the commission model because over 20 of these cases it evens out but if I had to say, ‘pay me $2,500 and I might be able to get you something better, but if I can’t, kiss your $2,500 goodbye’?
    The only clients who will benefit from nil commission are the wealthy ones paying big premiums. The other 95% of people who need insurance advice will lose out under a nil commission model.
    Of course the unions want commissions banned. A nil commission world with very few advisers wanting to discuss insurance will allow them (who I believe (& I’m happy to be corrected) receive a percentage of the insurance premiums paid from their funds ie commission) and insurers to charge anything they want & make claiming as difficult as they wish moving forward.
    Advisers, willing to work for commissions they may or may not receive, are the ones who are really keeping the bastards honest.
    Anti Commission = Anti Competition

    • John S

      Great example Guy.

      I do question however – how many people do you think will read your post? And of those, how many do you think are the general public and how many are advisers who receive the email from RiskInfo (like me).

      The issue is, the public need to be made aware of the way commissions (structured in the right way) offset the cost of advice allowing greater access. Once the public understand (I don’t think anyone will ever SUPPORT commissions) the reasons for them and how the benefit often flows though, commissions will become less of a dirty word.

      Surely, it should be the role of the FPA and AFA (I think we the vast majority of us pay compulsory fees to one of these two agencies to allow us to provide advice) to pass this message on.

      I’d rather have them connecting with the general public about these issues on our behalf, supporting advisers, rather than seeing my inbox filled with internal propaganda…

      John S

      • Phil Smith

        Agree John S. Choice has a wide ‘client base’ as opposed to the likes of an industry on-line newsletter. You can often drive a semi-trailer through the gaps left in Choice opinions/recommendations. They are not bought to account for their often very misleading assessment of ‘products’ and ‘services’. To them industry super life & TPD is the same as Life & own occ. TPD on the retail side. Even when the latter can be lower cost than the Life & TPD any occ. under industry funds. But you see, it’s all about that ‘evil’ commission. It doesn’t matter whether or not the consumer actually receives superior coverage at a more competitive price with good ongoing service & support. To them it’s – ‘commission – bad! – no commission – good!’

        • Ken

          Agree whole heartily Phil
          These idiots making these rules up as they go along have no idea of what consequences they are fueling for the rapid decline of advice in the future
          They have forgotten that commissions have for hundreds of years been a form of payment
          What about real estate agents car salesman medical supply sellers etc etc the list goes on
          Is the government going to ersdicate it in every profession trade and business ? Or shall we just keep the insurance companies and banks inside for now
          The biggest drug cartels would be proud of this lot

          • BKY

            I agree with both of you…maybe another way to achieve
            traction for the argument of retaining commission is to help the actuaries realise (I’m sure they already have) that without commission no-one is incentivised to review and replace product if it is in the “Best Interest” of the client, therefore leaving the actuarial numbers in jeopardy. Actuarial numbers factor in many variables and I’m sure one of them is the length of time a life stays on the books. Without commissions the insurers will have long-term customers resulting in increased risk of claims, which as we have all recently seen resets rates and drives up premiums. Have a look at the main reason why most legitimate claims are denied. It is usually due to non-disclosure…denied claims from non-disclosure relates to an insured event occurring within the first 3-years of the policy inception…after 3-years the life company are required to prove the non-disclosure was made “Fraudulently”, before they can deny a claim. A legitimate claim is rarely, if ever denied based on Fraud once the policy is over 3 years old. Without this risk management strategy of being
            able to underwrite a current risk and reset the 3-year period, in their back pocket, I only see premiums going up. But
            worse…if there are no riskies left, then as someone has already stated there, will be no checks and balances which is provided via the advice process and therefore consumers will be at the mercy of direct insurance and Industry Superfunds.

    • Dave

      You’ve hit the nail on the head Guy. Your example perfectly illustrates why the Industry (read Union) Super Funds want to ban commissions i.e. because it erodes the substandard cover they offer in their funds.

  • Jeremy Wright

    The FPA started so well, then shot themselves in the foot with their uninformed and
    politically correct mantra that fails every test for the long term survival of the retail life industry, by making a stupid comment to eventually remove Life Insurance Commissions.

    The other submissions came some way to defend commissions, though they failed the
    most important test, which is to ask clients how they prefer to pay for their Life Insurances and advice

    It is not about the costs rising for Australians as they state.

    It is much simpler than that.

    Australians will not pay a fraction of what it costs for advisers to provide Best Interest Advice, FULL STOP.

    As to Choice and the Financial Sector Union, Choice are totally out of touch and their arguments can be shot down easily, as they have NIL idea of what they are talking about.

    We just need the AFA and FPA to start doing do it.

    The FSU talk about employee hourly rate remuneration.

    Unions will always back union run organisations with lots of union members.

    The problem with that theory, is the advisers who are self-employed, pay their
    employee advisers and staff from commissions, so it becomes self-defeating to simply state the hourly rate must rise, when clients will not pay.

    It is simple to make bold statements such as remove commissions and charge a fee.

    The problem arises when that idea falls flat on its face and an entire industry that employs tens of thousands of people in the retail Life advice area, collapses.

    What we then end up with is the exact opposite result of the purported goal.

    Who loses?

    All Australians who are now unrepresented and will not be able to get advice.

    Who Wins?

    The union run super funds and Life Companies who can freely promote rubbish, with no checks and balances that to now has forced them to provide choice and quality products.

  • C.

    The FPA are an utter disgrace in relation to their commentary regarding Life Insurance commissions in addition to the possibility of future banning of pre-FOFA product commissions built into product pricing and in the most part enabling the adviser to provide advice and service to clients very often at a lesser cost than transferring to an alternative product.
    The FPA have become nothing.
    The FSU and Choice have no idea how this business works in favour of the client, so they may as well just keep quiet as they are commenting on something they do not understand.