November 9, 2018
The Financial Services Council (FSC) has thrown its support behind life insurance advisers recommending that no further changes be made to life insurance commissions beyond those currently taking place under the Life Insurance Framework (LIF).
The FSC made the recommendation as part of its submission in response to the life insurance hearings of the Financial Services Royal Commission in which it also maintained that financial advisers should receive commission payments for their efforts in placing life insurance for their clients.
Echoing sentiments expressed by ASIC, the FPA (see: Insurance Commission Not Under Review Till 2021: ASIC) and the AFA (see: Removal of Commissions Would Damage Insurance System), the Council stated the intended outcomes of the LIF regime was likely to reduce churn and changes in behaviour had already taken place.
“The FSC expects that, once the full extent of the commission caps as set out in the LIF Reforms come into force on 1 January 2020, there will be very little incentive for advisers to replace policies,” the FSC’s submission stated.
“…life insurance policies, by their very nature, ought to be treated differently from other products”
“In fact, the FSC expects that much of this incentive has already been removed with the implementation of the 80 per cent: 20 per cent caps as from 1 January 2018,” the submission noted.
The submission added that ASIC was also investigating financial advisers who had high lapse rates and had banned or suspended advisers where investigations found they did not act in the best interests of their clients.
The FSC stated that while it accepted the reasons for the introduction of LIF changes “…we submit that life insurance policies, by their very nature, ought to be treated differently from other products”.
The Council added that advised life insurance led to better consumer outcomes, stating it was important that consumers who preferred to obtain life insurance through an adviser could do so affordably “…and that the advice helps those consumers generally achieve more appropriate levels of cover, a better quality policy and the benefit of thorough medical underwriting at the time the advice is given”.
The submission covered the work required by an adviser to establish a policy for a client, including the application and underwriting process and highlighted how upfront and ongoing commissions kept the advice within reach of many consumers.
“The risk is that, if the caps on benefits/commissions are reduced to zero, people seeking advice would be required to pay for it up-front directly, rather than spreading the cost over the life of their policy. This would restrict access to advice on life insurance for low to middle income households, arguably, who are amongst those that need life insurance the most,” the submission noted.
“Reform in addition to what is already in train may materially impact on financial adviser numbers and the supply of life insurance financial advice – this would not be a good consumer outcome given the need for financial advice”.