September 25, 2018
The AFA has written to members informing them that large figures quoted at the Banking Royal Commission related to life insurance commissions overlooked legal obligations for advisers and equate to only $65,000 a year per adviser.
AFA Chief Executive, Phil Kewin provided the figure in a note to members in which he said the Commission’s questions about conflict of interest related to life insurance commission did not consider the Life Insurance Framework or Best Interest Duty obligations.
Kewin referenced the figure of $6 billion of commissions paid to financial advisers with respect to life insurance over a five-year period, which was presented to the Royal Commission during the hearings on 10 September by Counsel Assisting, Rowena Orr, QC.
Orr had already provided a list of commissions paid by separate life insurers and added, “That amounts to a total of more than $6 billion in commissions to financial advisers in connection with the sale of life cover issued by these 10 insurers in about five years”.
Kewin said this figure broke down to $1.2 billion a year “…and when divided by the number of advisers authorised to provide life insurance advice is $65,000 per year, per adviser”.
“…commission is not a driver that encourages a financial adviser to select one product over another…”
He also said these payments, which were fully disclosed in SoAs, went to advisers and licensees and covered all staff and business costs related to the provision of the insurance advice, and also required client agreement before any commission payments were made.
“The questions about a conflict of interest that this creates do not take into account that under the Life Insurance Framework (LIF), all insurers are paying initial commission at roughly the same rate and it is capped,” Kewin said.
“As such, commission is not a driver that encourages a financial adviser to select one product over another, it is a mechanism by which many clients gain access to valuable advice who would otherwise not have this opportunity,” he added.
Kewin also noted that advisers were bound by Best Interest Duty obligations and any consideration of commission payments “…needs to consider the extensive work that goes into the provision of life insurance advice, including the needs analysis, strategy design, product consideration, SoA production and presentation, underwriting and implementation”.
Kewin also highlighted the AFA’s ongoing concerns around direct life insurance and that the hearings publicly reinforced those concerns.
“We were pleased to see a strong message on the fact that Direct life insurance products are more expensive than retail advised products, with worse terms and often very low claims payout ratios,” Kewin said.
“In the context of the failure of the Parliamentary Joint Committee on Corporations and Financial Services’ inquiry into Life Insurance to raise these concerns, it was important to see them raised publicly by the Royal Commission,” he added.