Royal Commission Casts Doubt on Future of Risk Commissions

The Banking Royal Commission has cast a giant shadow over the long-term future of life insurance commissions.

Included in the 76 recommendations made in the final report into Misconduct in the Banking, Superannuation and Financial Services Industry submitted by Commissioner Hayne, the Commissioner has recommended that, in respect to the current life insurance remuneration reforms being implemented by ASIC as part of the Life Insurance Framework reforms:

“ASIC should consider further reducing the cap on commissions in respect of life risk insurance products.”

The Commissioner continued:

“Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.”

In a press conference following the public release of the Royal Commission recommendations, Treasurer, Josh Frydenberg, has indicated the Government will be taking action on all 76 of Commissioner Hayne’s recommendations, including ending all grandfathered commissions by 1 January 2021.

The Treasurer also indicated that ‘hawking’ for the sale of both superannuation and insurance products will be prohibited in future.

Riskinfo will provide more detailed updates and report industry reaction to the 76 recommendations in the three-volume, 496-page final report.

Recommendation 2.5 reads in full:

Recommendation 2.5 – Life risk insurance commissions

When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.

Click here to access the Final Report into Misconduct in the Banking, Superannuation and Financial Services Industry.

  • Aaron Zelman

    We know that advisers prevent under-insurance. Insurance in super is generally poor quality and value and insufficient.
    Sadly, there really won’t be many risk advisers before too long.
    ASIC has the power to make things good for us all.

    • Daryl La’ Brooy

      Aaron we can’t just shrug our shoulders and say whatever will be will be. We need to fight for common sense and show that commission abolition (like in the UK) leads to poor consumer outcomes. They reversed their decision in the UK. It should never be allowed to get to that point here!

    • paulkate72

      “ASIC has the power to make things good for us all”. What are you saying, Aaron? As one of the regulators ASIC is a key driver in bringing in all of these changes to the financial services industry.

      Really, in my book it’s the life offices which have been the catalyst in all of this. They wanted to regain the control they once enjoyed and by stealth enlisted the regulator/s to do their bidding. It’s worked handsomely. We, the advisers and stakeholders, have absolutely no control about any of these detrimental changes to our industry and to our businesses.

      Yes, ASIC might have the power to ‘make things good for us all’, but it’s ‘London to a brick’ that they won’t!

  • Daryl La’ Brooy

    It’ll be the world’s greatest personal risk insurance experiment. No country in the world has moved to a zero commission basis yet. We are going to be the first! Already individual policy volumes are down around 30% from anecdotal evidence I’m hearing, given the LIF reforms to date. So it’ll kill the direct risk market as well and all people will have is cover through their super funds. Advisers who charge no commission because they provide holistic advice will be the only ones around. Will the Life Companies be able to survive will a drop in the $8 Billion a year individual policy market?

    • Actually Daryl, I believe the UK did this first and it didn’t work out so well for consumers and they ended up repealing it.

      Now consumers have the choice how they should remunerate for their advice.

      • Daryl La’ Brooy

        Pete/Sue a good enough argument then to use the UK experience to remind ASIC a commission ban won’t work. It’s a bit like communism great in theory but doesn’t work in practice!

    • FR

      It is amazing the complete lack of understanding of this industry. Just being cynical.. perhaps state govt might fight the fight when stamp duties fall.

  • Roger Smith

    Zero Commission for Risk Insurances – Not a likely outcome. Who is going to work for No reward and “fee for service” is just a pipe dream when it comes to Insurance.

    • Jzee

      Might be a good idea to get your Authority from St Vincent De Paul! They give away things for free don’t they?

      • Roger Smith

        Excellent idea!

  • Andrew Ramsay

    Is Frydenberg saying that existing risk commissions will all be ending by 1 January 2021? I thought that was an issue to be considered by ASIC in 2021.

    Hayne’s comments (p.188) that he’s not convinced that a move away from commissions would see large numbers of Australians without an appropriate level of life insurance. Given I have very seldom seen an unadvised person with what most would consider an appropriate level of insurance I think that assertion will prove to be wrong. Of course, underinsurance isn’t the only issue. What about the quality of the product and the inability of consumers to understand the differences eg. directly sold IP policies that exclude mental health conditions? Underwriting at claim time leading to denial of claims when people thought they were covered. Perhaps ASIC will be able to see what Hayne appears to have missed.

    • Daryl La’ Brooy

      Not sure how Hayne has arrived at the conclusion in your first sentence. When someone dies young and leaves a family struggling financially, all those attending the funeral don’t run out and get cover for themselves to prevent the same financial misfortune visiting their family should the worst happen! Did Hayne proactively go out and buy life insurance when he had a big mortgage and kids at private school?

  • C.

    So, constructing a professionally worded letter to a potential prospect in relation to the services you offer would be now considered hawking and strictly prohibited.
    So, unless every risk insurance client either is a referral to you or simply walks into your office asking for advice, the ability for an adviser to professionally approach potential clients is now over ???????
    Are we being told we can no longer promote our business and services to others unless they invite us to do so??………how do they invite us to do so, if they don’t know what you do or where you are ?
    What a completely ridiculous and unworkable restriction of trade.
    The local medical practice can send me a flyer in the mail promoting the services they offer and inviting me to consider their practice, but I cant write to potential clients about my business ?

    • Advice Guy

      That’s not really correct. You are allowed to market your business and services without offering a product.

      • C.

        Is the very mention of a product or various products potentially considered to be “offering” a product and therefore considered as unsolicitored hawking?

        • paulkate72

          In actual fact, C., offering a product in a pre-approach letter or direct mail isn’t good form anyway. Better to construct a letter outlining issues the prospect might face and how you may be able to offer a solution. In other words, tailoring your letter from the prospect’s end will get you past first base more effectively than one from yours/our perspective. Even so, your concern about hawking is valid.

  • Phil Smith

    We sighed relief when [now falsely] told LIF and FASEA was enough to leave advised risk insurance business outside the scope of the Royal Commission.

    But no, Mr Kenneth Hayne is taking a sledgehammer to a walnut.

    IF ‘advised’ risk insurance commissions are to be further reduced or cut completely out – then we all know that spells the end of my and many other’s 30+ years in the life insurance industry.

    Very recent mortgage loan broking research showed well below 10% of all those canvassed would agree to pay a fee to a mortgage broker in place of the loan provider paying a [whopping – I think 0.60%] upfront fee to the loan broker.

    The bureaucrats, legal profession and governments alike just don’t understand the reality of providing risk insurance advice. We earn commission or [in the future] just charge fees against the one and same people. I.e. the ones that accept our professional advice. Those that do NOT accept our advice pay nothing [commission or fees] UNLESS they have agreed in writing to pay a fee BEFORE they sign the SoA. Who will do that in the real world? Especially a younger person where the premium cost may be ‘$250 a month’ – yet, we need to charge them $1200 if they DON’T move to the SoA stage and then $2400 if they do!

    Insanity!

    At least I hope I won’t be around [or in aged care] when the full impact of this ludicrous decision devastates the future government coffers and the tax payers’ pockets when only non-advised ‘direct’ or ‘group life’ insurance remains.

    They just don’t get it!

  • Matt

    All that the majority of advisers want to do is to help people and make a fair living while doing so. The legislators and consumer groups have been trying to kill the industry by 1000 cuts creating uncertainty, expense and stresses to those involved for quite some time. At least Mr Hayne is putting us all out of our misery in one fowl swoop.

    • Maybe Mr Hayne is running ‘chicken scared’ on this 😉

  • Jon van Omme

    Time to band together as an industry and fight back!

  • Phil Smith

    At least I’ve had confirmed Josh Frydenberg’s statement only relates to grandfathered commissions from the FoFA era. The issue is not Josh also saying he supports LIF and ASIC reviewing it in 2021. The big issue is a change of government! How do we ban together and stop that?

    • Daryl La’ Brooy

      We are urging all advisers to join the Finance Sector Union so that we’ll have a say when the Labor government is elected later this year and implements the RC recommendations.

  • Gregmax

    Does anyone know the legal definition of “cap” on commissions. My first reading of the above gives me some hope that “level commission” and “ongoing/renewal” commission remain unaffected. We need a QC to interpret every word of Recommendation 2.5

    • Bank Adviser

      Gregmax, Well Independents are doing far worst look at Dover and Henderson, The fees they charge is horrendous.
      I see this stuff all the time clients recommend for SMSF with very low balances.
      Mortgage Brokers receiving Trail because they give advice on Bank products or needs. The Gravy train over buddy its Fee for Service. The question is will the products become cheaper. This report hasn’t gone far enough why is their a need for over 1000 super products.

  • Mark Schroeder

    The Banks were found to be responsible for the majority of WRONGDOING against consumers. Yet it will be the non-bank Financial Planners and Mortgage Brokers who will pay for the Banks’ wrongs with their livelihoods. The banks have been “unscathed” and the Government will wipe out the only competition and alternative to the Banks, the non-bank Advisers

    • Andrew

      This is absolutely true. In all the 76 recommendations I couldn’t see anything that suggested any change to Bank revenues. Only changes that affect small and medium sized business revenues through the banning or changing or fee arrangements, commissions and other ways of funding advice. I also find it interesting that in this process no-one has thought to ask the wider community / clients whether they will still be able to afford financial advice, risk advice, mortgage advice and so forth if in fact they have to reach into their own pockets and pay the fee’s associated to this level of advice in its entirety

  • paulkate72

    The removing of commission on life-risk sales makes no sense. Now that all life companies pay only 70% upfront to advisers surely means that whichever life office we recommend wouldn’t be because one delivers higher commissions than another. So no conflicted advice from where I stand.

    This might well be the final nail in the coffin of the life insurance industry as a business for its practitioners who’ve been providing a service and making a living from it for well over 100 years will come to a close. Monumental tragedy really, caused by the regulator and its allies who are seemingly clueless about its impact.

    • Advice Guy

      I take your point Paul but there’s more to it than that unfortunately.

      If a client comes to me as an adviser requesting a cheaper premium or even an increase in their cover the argument is that a conflict exists as I am paid more to move the policy to a rival insurer than to keep the cover where it is. I am also paid my commission based on the amount of insurance a client purchases or at least by how much they pay in premium. Sadly, because of this I have seen first hand clients pay for loadings and occupation ratings they should absolutely NOT be paying for.

      I am 100% in favor of the commission model as I think it’s the one that works best but we also need to do something about the conflict it creates for some people.

  • Phil Smith

    It is important to recognise that under 2.5 of Mr. Hayne’s report he has said any change to commission should be determined under the planned review by ASIC in 2021. He states ‘…unless there is a clear justification for retaining…commissions [i.e. after 2021], the cap should ultimately be reduced to zero.’ So as an industry, let’s make sure we clearly and concisely convey between now and 2021 – that under-insurance in Australia will become pandemic IF commissions are removed. Further Mr. Hayne’s states that ultimately it is ASIC who must make any such decision.

    For me, initial alarm has turned to a sense of unease [uncertainty?]. Ostensibly, 70% comm will prevail in 2019 and 60% in 2020. But, what will we do together to keep it above [say] 20% flat or zero after 2021?

  • Roger Smith

    I think we might be jumping the gun here. The reference to “Future of Risk Commissions” must be referring to New Business Commissions. Not a new topic but one that commonsense would suggest will have a positive outcome (if you can call a 50% reduction in commissions “positive”). If “ongoing commissions” were tampered with, surely this would be a breach of a contractural arrangement which was fully disclosed in the SOA and the only means by which a client would receive service including assistance at claims time, doing the Life Office’s admin work etc etc etc. If this were the case, I think we would see that the legal profession would be “stalking” people in our Industry to fight the “fight of fights” . It’s a fight that I will gladly be involved in and if necessary we should all be prepared to put our hands in our pockets to fund such a fight. It’s our livelihoods and the value of our business’s will be determined by such actions. If you don’t value your worth don’t get involved.

    • Gregmax

      I agree with Roger. This whole debate/debacle around commission has been driven by ASIC ( full of lawyers ) and now the Royal Commission ( overflowing with lawyers ). We need a VERY experienced, highly regarded barrister/QC/SC/ retired judge on our side, who can interpret the legal speak to find a positive path for us. If you are a member of any of the “associations” get on to them immediately to have their legal counsel provide you with an opinion. At present we seem to be fighting a well armed and trained “army” with only our strong wills…….. but without weapons, which in this case are legal interpretations and precedents.

  • Concerned

    A question has been asked – how do we band together? Firstly, the LICG is up and running again. May I suggest it is important to join them! Secondly – and I have said this in past editions of RiskInfo and will say it again – there needs to be a “collective” representation of our industry to Govt. The LICG, AFA, and insurance companies need to band together and as one voice, make the Govt understand that LIF must be amended. Reinstate commissions, get rid of this evil 2 year clawback and rid us of the FASEA nonsense! Please guys – before it’s too late!

    • Concerned

      For anyone interested, the LICG is now known as the United Financial Advisers association – UFAA.

  • Roger Smith

    Twenty years from now – conversation. Question “what’s a Risk Adviser. Answer “It was like a Dodo bird and they are both extinct”

  • Jim

    At least we wont have to go back to university for 2 years to study totally irrelevant subjects to advise people of their insurance needs.

    I hope you all have Income Protection and TPD. Mental Health claims are going to sky rocket. This coupled with a massive reduction in new business will drive up the costs of insurance for everyone and put many insurers out of business.

    TPD will be easy to claim as in 2 years we will not be suitably qualified to do the job we have done for the last 30 years, and even if we are, that job will no longer exist.

    Does anyone know a good pschologist?

    • Roger Smith

      Reduced new business inflows coupled with increasing claims and failure to be able to meet Life Office Capital Adequacy requirements = Failure of a system that has served the community well since 1849.

      • Phil Smith

        Plus Mr Hayne has recommended effective removal of the ‘duty of disclosure’ provisions under the current Act. Apparently, a person can now ‘forget’ they had cancer 10 years ago and not be held to account at claim time – when they claim for a new or recurring cancer event. Fundamentally, why the removal? Direct insurance – NOT asking enough questions at submission time then underwriting at claim time. You can add that to the cost of future insurance premiums as well. How many ‘advised’ retail client claims are rejected compared to direct and group? Ask the life companies, also the reinsurers like Hanover.

  • Why can’t the Looney Left learn from past mistakes? Removing commission from life insurance was implemented some time ago in the UK. A few years down the track, after the ensuing disaster, commissions were reintroduced at hugely increased rates to get advisers back into the game.
    However, looney left-wing ideology never has and never will be overridden by either common sense nor history.
    If history has taught us one thing it is that the looney left refuses to learn from history.

  • Phil Smith

    Channel 7 news reporting tonight on the abolition of all commissions on ‘life insurance’ products. That wasn’t what I read in Mr. Hayne’s report? 530 page report – open to all sorts of mis-reading and mis-quoting. Wonder how much else has been ‘erroneously’ reported in the media. Especially on the ABC and SBS and in all the leftie newspapers.

  • Phil Smith

    Also agree with Roger Smith & Gregmax. Mr. Hayne has only stated all grandfathered commissions resulting from the FoFA implementation must be removed. 1. there is an existing legal agreement between the Licensee [and the AR as the adviser] with the insurance company. 2. Before FSRA there was a legal contract between the agent and the life offices. To this day where the life office had a commitment to pay the ongoing commission for the life of the policy to the writing agent – it continues to be paid [I know this for a fact as I have around 100 such legacy policies]. FSRA did not override this arrangement. FoFA did not nor did LIF. 3. as Roger said – the SoA is a written agreement [contract?] with the customer agreeing to the ongoing payment of renewal income for as long as the client choses to pay their risk insurance premiums. As a closet lawyer it would defy legal boundaries to use conflict of interest as a valid argument to cease ONGOING renewal commissions. I for one would put my hand deep into my pocket to fight that one. And as Roger says, the issue was around initial NOT ongoing commissions. Even Bill ‘Leftie’ Shorten stated at the time he felt [20%] level commission was acceptable. For Mr. Hayne to ‘suggest’ eventual reduction to zero commission is not legally achievable. Paying any of us 5,10 or 20% ongoing ‘servicing’ commission [as I like to call it] has absolutely nothing to do with any conflict of interest. However, if any budding lawyer out there can state otherwise – bring it on.