Labor May Ban All Risk Commissions

The Federal Opposition has confirmed it would ban all risk commissions if ASIC’s 2021 review of the impact of the Life Insurance Framework reforms offers no clear justification for retaining them.

Labor’s policy on the future of risk commissions is contained in its formal response to the Banking Royal Commission’s recommendations, which was released at the end of last week (click here for Labor’s full response).

The present Opposition’s stance on the future of risk commissions differs from that of the Government, where the Coalition has stated it will mandate a level commission regime if ASIC’s 2021 review does not identify significant improvement in the quality of advice following the three-year Life Insurance Framework remuneration transition period.

A joint release by Opposition Leader, Bill Shorten MP, Shadow Treasurer, Chris Bowen MP and Shadow Minister For Financial Services, Clare O’Neil MP, coinciding with the release of Labor’s detailed Royal Commission response document, states in part:

“Unlike the Liberals, we will fully implement the Royal Commission’s recommendation to end the hawking of insurance products, to ensure there are consequences when the big banks breach industry codes and to ban life insurance commissions if ASIC finds there is no clear justification for retaining them.”

The full wording of Labor’s position on the future of risk commissions, detailed in its response to the Banking Royal Commission’s recommendation 2.5 is:

If there is no clear justification for retaining life insurance commissions, Labor will ban them

“Labor will ensure that ASIC conducts a review of life insurance commissions. This review will also consider other exemptions to the ban on conflicted remuneration identified in recommendation 2.6 [general insurance, consumer credit insurance].

Unlike the Government, Labor will fully implement this recommendation by ensuring that ASIC considers whether there is any clear justification for retaining life insurance commissions. If there is no clear justification for retaining life insurance commissions, Labor will ban them.”

This approach compares with that of the Coalition, whose exact response to recommendation 2.5 reads:

“In 2017, the Government enacted reforms to life insurance remuneration that capped the commissions a financial adviser would receive for providing advice in relation to the purchase of a life insurance product. As part of these reforms, the Government announced that ASIC would conduct a review in 2021 to consider whether the reforms have better aligned the interests of advisers and consumers. If the review does not identify significant improvement in the quality of advice, the Government stated it would move to mandate level commissions, as was recommended by the Financial System Inquiry.

The Government supports ASIC conducting this review and considering the factors identified by the Royal Commission when undertaking this review.”

As a reminder for advisers, the Banking Royal Commission’s recommendation 2.5 reads:

“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.”

Labor’s confirmation of its position on the future of risk commissions follows its earlier pronouncement that, if it is elected to Government in 2019, it would bring forward the timing of the Royal Commission’s recommendation 2.4 to repeal the grandfathering provisions for conflicted investment and superannuation remuneration to 1 January 2020. This is one year earlier than that outlined in the present Government’s response, which targets an effective date of 1 January 2021 for the repeal of this FoFA carve-out.

  • Peter Jones

    Can someone please talk about the positives that this industry does. Why is this industry (including small businesses) constantly under attack from these politicians? No-one wins if an industry is destroyed.

    • CAFS from WA

      Peter, when you want to get rid of your competitor – you don’t highlight the good they do – you try and attack their credibility. It is not an Industry that is being destroyed. The ALP is openly and unashamedley stating that Independent Financial Advisers who operate under the current remuneation system will be the hardest hit if this ridiculous notion gathers momentum. As all Advisers around Australia know this proposed action of banning commissions will drastically reduce the number of participants who operate as IFA’s. It’s exactly what the ALP want to happen. They are effectively removing competition to assist their mates who operate in the Industry Super space. I urge you and all other Advisers around Australia to become active and join the United Financial Advisers of Australia (UFAA). Only as one collective voice can we meet this challenge head on.

      • Concerned

        So true CAFS. The ignorance displayed by the ALP, Commissioner Hayne and even the coalition for that matter, is appalling. But you are correct – the ALP is just sucking up to their union mates. None of these bodies, and that includes ASIC, can see they are destroying and entire industry, not to mention the massive under-insurance problem it will create. I am going to repeat what I have said in previous editions in Risk Info – the AFA and now the UFAA, and even the life insurers, must go to the government collectively and make them see the truth behind what has and is happening and the dire repercussions for this industry Australia wide if it continues. The life insurers have reported reductions in New Business – what did they expect? So this collective representation needs to be made well and truly before ASIC begin their review in 2021. These groups need to go the government sooner rather than later. the longer they leave it, the longer the recovery period. Lastly, if any adviser is yet to join the UFAA, please do so asap. make your voice heard.

    • Old Fella

      Great comment Peter. It’s what we all need to be doing. Unfortunately the Royal Commission was into ‘misconduct’ and would not accept submissions on the postives.

  • Ken

    I do hope the AFA is onto this NOW and the FPA need to get involved as well
    I like numerous others have borrowed money to buy out my partner and if this continual destruction of our industry continues I will sink like a stone with a nil commission ragime
    Surely even these self absorbed short sighted politicians can see the destruction this will cause to a 160 year old industry the growth of under insurance poor policy options and a powerful unrelenting strain this will put on the social security and health systems as clients avoid what has already become a very optional product to them with huge price increases over the past few years. Without experienced advisers pointing out why they need it it will become even more optional.
    The mortgage industry has already began their fight with TV advertising and government lobbying strangly enough the mortgage options are the only one of the 76 recommendations that is being reconsidered by government ( actions speak louder than words) We all need to get involved in this fight it is wrong wrong wrong! We need the government backing not their short sighted interference.
    It was the banks that the Royal Commission was conceived for to look into their behaviour NOT US but we are the ones being ostisied while the banks get off virtually Scott free
    We must act now AFA you lead we will follow I am sure

  • Luke P

    Lets learn from the Mortgage Brokers mistake, we all need to start sharing publicly the good work which is being done.

    The Brokers have joined together and are making headway, we have the opportunity to get ahead of this but we need to be a lot more vocal.

    Share your stories of wins for clients on LinkedIn, facebook, news letters and with friends. Don’t let people wonder what we do for the trail, show them.

  • C.

    The statement using the terms ” no clear justification ” is ambiguous, subjective and open to any interpretation necessary in order for a pre-meditated outcome to be implemented.
    The results of ASIC 413 Report proved that clear justification was not necessary to implement a further decrease in commissions from the then Hybrid model of 80/20 as this resulted in an advice success rate of 93% of the files assessed utilising that remuneration model.
    ASIC 413 Report contained no evidence leading to justification of the outcomes of the Life Insurance Framework as there was no data that supported the proposal that the lower the commission amount below the Hybrid 80/20 model the greater the advice success outcome for the consumer.
    So, the Life Insurance Framework outcomes of reducing the commissions from 80% to 70% and then 60% has absolutely no clear justification or supporting evidence.
    The notion of the consumer receiving higher quality advice and enhanced advice outcomes if there is no commission paid at all is completely false and unfounded.
    If the outcomes from ASIC 413 Report were scrutinised on that basis it would mean that the advice success rate of 93% would increase to say 95% if the current 70% rate was assessed and possibly 97% or higher if the forthcoming 60% rate was applied.
    But there is no basis at all or correlation to support this notion.
    If Kenneth Hayne’s, ASIC’s and the Labor Party’s approach were to be followed in relation to zero commissions it would be expected the advice success rate would be 100% in every case, every time.
    This is entirely unrealistic in any profession or industry and is based on ideology and not reality.
    The proposal to reduce commissions to zero will hand power back to the larger institutions and insurers, reduce competition and increase the cost of accessing quality risk insurance advice to the consumer significantly.
    What Labor will argue in 2021 will be that the justification to retain insurance commissions on the basis of ensuring the small businesses and advisers actually providing the advice remain viable is not a ” clear justification ” to retain commissions.
    Any other justification at that time will be guaranteed to have been manipulated,falsified
    or created in order to achieve a preconceived outcome.
    Kelly O’Dwyer had no basis or evidence whatsoever to support a further reduction in commissions from the 80/20 combination that produced exceptional advice success rates from the ASIC 413 Report.
    O’Dwyer made decisions that had no clear justification, but she supported them anyway because she had a close relationship with Sally Loane from the FSC and the FSC member institutions were wielding way to much power, influence and political donation capital to argue against them.
    All O’Dwyer did was repeat an empty mantra of ” enhanced consumer outcomes ” as her reasons , but she had no evidence to support this stance.
    When a senior minister is making decisions of this scale with no supporting evidence on which to make them, it is negligent.
    In 2021, a “reason” WILL be created to achieve what ASIC, Hayne, Trowbridge and the Labor Party have been trying to achieve for the last few years and that is a complete dismantling of the independent adviser network and the handing of immense power, capital and control to the industry super funds both from the funds management and insurance perspective.
    There is an insidious and poisoned drive to nationalise and institutionalise financial services on the basis of a socialist philosophy and the people behind that push will stop at nothing until they reach their intended destination.
    In the end….the loser will be the consumer and the Australian people.

    • AW

      Very well said. How would average Australians feel knowing that lives are destroyed and jobs lost. It is just amazing what is happening in this industry.

  • Damian Eales

    It is obvious the Mortgage Brokers are putting their money upfront to get their message across. Relying on the Toothless Tigers (AFA & FPA) to fight for us has been a complete waste of time and our money. They were told to shut up and accept what was given to them and they try to tell us the Fought the Good Cause. Everyone has to knoch on the door of their Elected Representative and more importantly the Senators on the Cross Benches. These Senators will hold the real power in the next Parliment, not the House of Reps. Maybe Derryn Hinch could actually do some good for Australian Business and support us.

  • David

    Well people lets not vote (not that they were going to get mine) for Labor…..

  • PS

    Banning mortgage broker trail commissions is hard to argue against. Banning ongoing servicing commissions for ARs is an entirely different issue.
    1. IF this eventuated would life offices REDUCE their existing client’s premiums? NOT a chance [where they’ve already paid ‘upfront’ commissions]! Yet, we would be expected to ask the client to now pay us a ‘fee for service’ that is ADDED to their ‘same’ premium cost. In what universe does this make any sense?
    2. The longest period I spent on a client claim was 55 hours [in total]. My base hourly cost [before any profit/salary] is $150 [+GST]. To provide the same service to my client I would have needed to charge them an $8,250 fee + GST – this is without my previously ‘banked’ servicing commissions.
    3. How can under-insurance issues go anywhere but South if there are no risk insurance advisers left after [say] 2021 when the review is complete?
    4. The majority of clients referred to me do NOT require a full financial plan. Some already have a planner, but are sent to me as a risk specialist.
    5. There is nothing wrong with level commission. The whole issue arose from the exaggerated ‘churning’ debate. Are we to seriously believe that ARs would try and replace an existing policy purely for remuneration gain – if commissions are level? If the client ‘likes you’ and wants you to look after their insurances, then simply do a change of adviser request. Client happy and best interests achieved if their existing policy remains the best option for them.
    6. Over 33 years I have accumulated enough ‘servicing’ commission to cover my base cost to service my clients. Any new business commission is pure ‘profit’. Nice, but not essential. How exactly do I go to 300 existing clients [some of 30 years duration] and tell them I now have to charge them a fee on top of their premiums? The guilt I would feel handing a claimant a bill for [say] $4,000 for helping get their claim paid out to its full potential.
    7. And don’t be fooled by the FSC and its member life offices. One way or the other they’ll survive.
    THE ONLY WAY TO SERIOUSLY FIGHT THIS IS TO JOIN THE FINANCIAL SERVICES UNION. Labor will listen to unionist’s views, but not ‘big’ or ‘small’ business.

    • Daryl La’ Brooy

      This policy announcement means anyone looking to buy a book of clients with risk insurance trail commissions would have rocks in their head! Therefore Labor has just gone and zeroed the value of all risk businesses assuming the ban is for all trails on current risk policies.

      • Ken

        My understanding that at this time it is only aimed at upfront new business commissions ??? but in saying that it is a target for the future unless we move quickly to secure the retail insurance industry or it will certainly be a chance

        • Squeaky_1

          You are correct Ken in saying it is only aimed at upfronts. Comments here speculating about what was not said in the article are way off base. In this whole menagerie of talk about banning risk commissions there has not been mention of banning existing renewals. Contrary to Daryl La’Brooy’s comment about ‘rocks in head’ the truth couldn’t be more opposite. IF upfronts are banned then the most valuable thing in the world to a risk adviser will be a reliable source of ongoing income.
          Facing a world without upfront risk commissions will place a new, higher value, on an existing client base, a client base which will be seen as gold. In the final analysis, labor and liberals say lots of things prior to an election. Mr. Shorten will still have to deal with a real world if he becomes PM and as we know election promises and sound bites are like fairy floss in the wind.
          There can easily be believable reasons why certain things may not be able to happen – we’ve seen and heard it all before with pollies. Nobody will have the will or strength to ban upfronts and if they do a renewal stream will be even more valuable to a risky.

          • Daryl La’ Brooy

            I hope you are right because prior to the Royal Commission no one said Grandfathered trails would end this year and advisers were borrowing literally a million dollars to buy client bases with grandfathered commissions in them, What do you say to these people now who acted in good faith and are going to be in dire financial straits soon? Buyer beware?

          • Greg Hayter

            I have to agree with Squeaky and Ken. All the talk is about “upfront” commission, but unfortunately the “outside experts” don’t know, or care to educate themselves, about the difference between level and upfront commission. Long established, well run, profitable life risk books will increase in value after all the screaming, headline grabbing garbage has had it’s 5 seconds of glory. To be successful in this business you need a truck load of perseverance, currently we need a semi trailer load of it. Never Give Up !