November 8, 2018
ASIC has told the Financial Services Royal Commission that it will not seek any changes to life insurance commissions to at least 2021 and that any sudden ban on commissions would negatively impact consumers.
In its submission in response to the life insurance hearings of the Royal Commission, the regulator stated that since it released Report 413 in October 2014, poor quality advice on life insurance had continued.
The submission, however, also detailed the intentions and timeframes around the Life Insurance Framework (LIF) changes noting, “The limitations on life insurance commission have, however, only been in effect since 1 January 2018”.
The regulator added that a post-implementation review would take place in 2021 to assess the impact of the reforms and data was already being collected for that review.
“ASIC considers that if no significant improvement has been made on the findings reported in ASIC Report 413, there would be a compelling case to remove the exemption from the ban on conflicted remuneration currently afforded to the sale of life insurance products altogether,” the submission stated.
…a shift to zero commissions for retail advised insurance would drive consumers away from insurance or, alternately, to less suitable products…
In describing why the Federal Government had adopted the LIF regime, ASIC also highlighted that a shift to zero commissions for retail advised insurance would drive consumers away from insurance or, alternately, to less suitable products.
“These measures were introduced as a response to the risk…that an abrupt move to ban commissions would result in the cost of advice being passed to consumers, which could result in individuals: a. not purchasing life insurance (leading to potential under-insurance); or b. purchasing through alternative channels, which have fewer consumer protections”, the submission remarked.
The call from ASIC was repeated in the submission from the FPA which recommended no further changes should be made to life insurance commissions, including a reduction to zero, and the LIF arrangements allowed to be fully implemented.
“The FPA does not believe another review of these arrangements is appropriate and urges the Commission to allow the agreed time frame to run before further reviews of life insurance commission arrangements are conducted,” the FPA submission stated.
Responding to a question on whether the cap on commissions should continue to reduce to zero, the FPA wrote that any reductions should be in line with the LIF model, which was intended to reduce the financial incentive for advisers to churn life insurance policies.
“We believe the behavioural and advice quality changes the LIF was designed to achieve are already being seen across the industry. However, the full impact of this change, supported by the Best Interest obligations and the new education and professional standards framework, needs to be experienced and assessed before further changes are considered,” the submission added.
The AFA publicly released its submission late last week and called any move to remove commissions from retail advised life insurance as a ‘global experiment’ that existed nowhere else in the world which would create lasting damage that would be difficult to reverse (see: Removal of Commissions Would Damage Insurance System).