February 19, 2019
The Association of Financial Advisers has released a scathing analysis of the Banking Royal Commission’s recommendations on the future of life insurance commissions, arguing that Commissioner Hayne’s risk commission recommendations contain errors, misunderstandings and are based on an ideological bias.
In addition to detailing what he identifies as errors and misunderstandings in the Banking Royal Commission’s final report (and also in its Interim Report), the AFA’s General Manager Policy and Professionalism, Phil Anderson, also asserts in a statement released this week that the ideological determination of the Royal Commission to eliminate all conflicted remuneration has contributed to statements made in the final report that appear to be without justification or evidential support.
Reflecting on the detail of Commissioner Hayne’s risk commissions recommendations, Anderson made a range of observations:
Anderson notes Commissioner Hayne’s discussion on life insurance commissions was brief – just four pages – but that the Commissioner fills one of those four pages with a table of the commissions paid over a period of five years for life insurance advice: “$6.1 Billion is a large number, although this is $1.2 Billion per year and when looked at in terms of the average amount per adviser authorised to provide life insurance advice is only around $65,000 per year,” says Anderson.
He added that the use of the $6.1 Billion figure is deliberate and repeats the opening statement to the Insurance round of the Royal Commission in September 2018. “The AFA challenged this back in our Insurance round submission,” says Anderson. “It is a bit like saying that the total Medicare benefit payments to doctors and medical service providers was $23 Billion in 2017/18. On its own, this total Medicare benefit number has limited relevance to what happens at the individual level.”
Anderson asserts Commissioner Hayne’s final report incorrectly interprets the Life Insurance Framework model, citing language on pages 186 and 187 of the Final Report that includes the following:
“From 1 January 2018, conflicted remuneration includes volume-based benefits given to a licensee or representative in relation to information given on, or dealing in, a life risk insurance product. A monetary benefit relating to a life risk product will not be conflicted remuneration if it is a level commission within the applicable cap and provides a ‘clawback’ arrangement if the policy is cancelled, not continued, or the policy cost is reduced in the first two years of the policy.”
The clear error is in the suggestion that the cap and clawback arrangement applies to level commission business
“The clear error is in the suggestion that the cap and clawback arrangement applies to level commission business. It does not,” says Anderson, who clarifies that the Life Insurance Framework model applies to upfront commission arrangements only.
“We were certainly surprised to see this error, particularly given that the AFA had pointed out the exact same error in our response to the interim report… Unfortunately, this was just one of a number of errors in the interim report that were repeated in the final report.”
Anderson questions Commissioner Hayne’s interpretation of the quantum of life insurance held inside Australia’s superannuation system.
Within the context of underinsurance being used as an argument to retain life insurance commissions, Anderson reflects that Commissioner Hayne is clearly not ‘sold’ on this argument: “His counter argument is that the overwhelming majority of life insurance policies are held through superannuation,” notes Anderson, adding, “He is clearly referring to Group Superannuation arrangements in this section, not appreciating that they only represent a very small number of policies (as individual members do not have their own policy), even if they do represent a large number of members.”
In disputing the proportion of life insurance held inside group super, Anderson notes Commissioner Hayne “…also fails to state that the retail advised product is a much better product (i.e. own occupation, terms and conditions, guaranteed renewable etc. etc.),” and that the Commissioner’s argument “…also fails to take into account the likely consequences of the Government’s Protecting Your Future Package, which KPMG estimated would reduce the level of group super cover by 50%.”
Anderson also argues that Commissioner Hayne’s focus on underinsurance should not be the only measure of importance, that “…surely the amount paid out in claims is even more important in delivering the right outcome for consumers. This should be measured in terms of money in the hands of clients and take into account the leakage that goes to lawyers assisting with insurance claims.”
Questioning the degree of thoroughness undertaken by the Royal Commission in its consideration of the appropriate amounts of life insurance cover held by Australians, Anderson commented:
“The Commissioner accepts that members of group super funds do not have the same level of cover as advised clients, however then he goes on to strangely suggest that he is not convinced that this would leave large numbers of Australians without an appropriate level of life insurance. Clearly the Royal Commission needed to do more work in this space, however we cannot expect them to be experts on everything.”
More Errors and Misunderstandings
Anderson then turns to Commissioner Hayne’s recommendation that if ASIC’s 2021 review of the Life Insurance Framework reforms indicates commission caps do not contribute, or at least not significantly contribute, to addressing underinsurance then ASIC should continue reducing the caps – ultimately to zero:
ASIC …do not have any power to alter the level commission arrangements
“This highlights further errors and misunderstandings,” says Anderson, who outlined:
- Firstly, ASIC only has powers to reduce the commissions on upfront (LIF) business. They do not have any power to alter the level commission arrangements.
- Secondly, a quick check with a few life insurers would no doubt clarify the impact that LIF had in 2018, with a material reduction in new business.
Probably the most alarming issue, according to Anderson, though, is the implication of Commissioner Hayne’s statement that if moving to 60% upfront commission will not have much impact on underinsurance, then going to zero will have a similar impact: “Many financial advisers will find it challenging with a 60% upfront commission rate. If it went to zero, they will simply leave, and leave in droves. We can only imagine what a devastating impact that this would have on the state of underinsurance,” warns Anderson.
Anderson notes Commissioner Hayne concludes that any decision on the future of risk commissions should be based on clear evidence that the harm that would flow from abolishing commissions would outweigh the harm that already flows from allowing this form of conflicted remuneration to continue.
…this ideological determination to eliminate all conflicted remuneration is contributing to statements without justification or evidential support
His response: “We can only wonder what he bases this judgement on. We could easily respond by saying that ASIC Report 413 revealed a 93% pass result for hybrid commissions, which was a higher commission rate than we have now. It seems that this ideological determination to eliminate all conflicted remuneration is contributing to statements without justification or evidential support. There is a much stronger basis to say that there is little harm done to clients as a result of life insurance commissions and that the Royal Commission provided nothing to prove otherwise.”
In a call to advisers and the life insurance sector in general, Anderson concludes his statement by stressing how important it will be for the industry to prepare well in advance of ASIC’s 2021 review of the impact of the Life Insurance Framework reforms “…and that we must clearly articulate the value of retail advised life insurance and the importance of commissions in making quality life insurance available to all Australians.”
Click here to read the full statement released this week by AFA GM Policy and Professionalism, Phil Anderson. Anderson will be outlining his position direct to advisers over the coming fortnight as the AFA conducts its national Connect Tour 2019 Roadshow, which will be visiting all state capitals.
Anderson’s statement this week follows an initial, higher-level AFA release immediately following the publication of Commissioner Hayne’s recommendations (see: AFA Stands Firm on Risk Commissions).