ASIC/Treasury Review – Quality of Life Insurance Advice

Phil Anderson, General Manager Policy and Professionalism at the Association of Financial Advisers talks with Riskinfo about the current review of the quality of life insurance advice – initially the responsibility of ASIC, but now assumed by the Treasury…


Peter Sobels: Phil, can you give us some background on the review of life insurance commissions that was initially being undertaken by ASIC?

Phil Anderson: This was a requirement of government that was part of the original announcement of the life insurance framework of June 2015. It said it was going to put in this new regime including caps on up-front commission payments, and clawbacks. And then after that was implemented it would assess the effectiveness of it.

From 2015 to 2017, when the legislation was passed in parliament, the end date was pushed back. They said they’d do the original review in 2018, but they moved it to this year (2021).

So, this was something the government asked ASIC to do, and it was to complete the review and deliver a result to government. The government said it would need to make a decision as to whether it does anything further with life insurance commissions.

We hope it does not, and we will be doing everything we possibly can to advocate for no further reductions in life insurance commissions.

ASIC commenced discussions about its methodology with us early last year and agreed it would do a bench-marking exercise based on May 2017, which is before the LIF reforms came into play.
In the later part of last year and into this year, it has been requesting files from May 2017.

It has gone through 120 odd licensees and requested files from them, and this has been done on a random basis, taking into account the business that has been generated through the life insurers and then random from that point onwards.

We are talking 500 files in total, and no individual adviser is required to provide more than three files and that is the exercise that will form the benchmark. ASIC has mostly got those files in and is reviewing them…So that’s the first part of it.

The second part is when they go and look at files from 2021, but they have to finish their review of the 2017 files first, and then it will identify who it wants files from later in the year.

We think it will be doing the bulk of the review work next year (2022), and then the finalisation of the report was intended to take place in the second half of 2022, and that’s when we expected the results to be released and given to government.

Peter: So, what’s changed in recent months?

Phil: On 21 April 2021, Minister Hume announced that the 2021 LIF review will be rolled into the Quality of Advice review that Treasury is running in 2022. The Minister advised that it was proposed to rationalise these two reviews by merging the LIF review into the broader Quality of Advice Review, which was a Royal Commission recommendation (2.3).

ASIC will still collect the client files and undertake the file review, however once they have finished the assessment of the files, they will hand over the results to Treasury and they will then incorporate it into their final report.

We think that this is an appropriate action to take, and now the LIF review will be assessed in the context of the broader issues with access and affordability of financial advice. Treasury will be investigating the issue of under-insurance, which was suggested by Commissioner Hayne.

Peter: Ok, so looking at what’s now a data collection exercise for ASIC, will it be collecting the 2021 client files from the same advisers it looked at in 2017, or will it be a completely different set of advisers for 2021?

Phil: It is our understanding it will be another completely random exercise, so if an adviser was selected from the 2017 files and is selected again this year, then that will be down to random chance. We will have to wait and see how that plays out, but we are told it is two separate exercises and two independently random exercises.

Peter: Will ASIC target specialist life advice firms or the full range of any firms that offer risk advice?

Phil: I think the sample ASIC is drawing from is based on the amount of business that has been done. So, the more business that’s been done with life insurers the more likely it is that you’ll be selected.

I think risk specialists are more likely to be selected through this process simply because they have more active files.

What we understand is that where ASIC has gone out seeking files, and there were no genuine advice files from that period, then they have gone back to look for other people – they want 500 files for the benchmark.

Peter: Do you have any sense at this stage of the outcome of the review when it’s finally released by the Treasury?

Phil: If the review outcome demonstrates a material improvement in the quality of the advice between the 2017 benchmark and the 2021 files then we are absolutely safe. There will be no basis for any further change.

That will show that the LIF reforms have been effective in dealing with what was claimed at the time, such as inappropriate product replacement, or as is known in the market – “churning”.

A lot will argue that where “churning” did exist it was pretty easy for life insurers to stop dealing with those people. That’s the history of this, but what we have to ensure is that when the results come out from the 2021 file review, it delivers a quality outcome and that the final report shows there has been a material improvement in the quality of the advice.

However, any decisions made that are based around the final outcome of the report may become a little clouded by the fact that Commissioner Kenneth Hayne talked about the issue of under-insurance and whether that should be included as a factor in this. I think the evidence is going to highlight that it is a continuing issue.

So, there are a couple of factors in here, but if the advice that is provided in 2021, and those files under review are quality files, then it will clarify this point and we will be in a position then where we can have a conversation about what’s in the best interest of clients in getting access to life insurance advice.

Peter: I assume those advisers asked to submit files to ASIC have nothing to fear and that their files will only be used for the purpose of this review?

Phil: ASIC is only looking at a small number of files. If ASIC sees what it might call ‘egregious conduct’ then it could well use that as a trigger to look further. But that would only happen where really poor advice has been provided.

Advisers should not overly fear this process, but they are going to have to provide the files if they are asked for them. But as long as they are reasonable files there will be no further action.
It is not a big enough sample for ASIC to take further action and it has bigger issues to deal with.

Peter: ASIC does have bigger issues to deal with, but I’m presuming the AFA will be looking at the outcome of the Treasury’s review as pivotal to the future of life insurance advice and life insurance remuneration?

Phil: Absolutely. This is a really critical exercise. It’s recognised in that context by not only the AFA but by other key stakeholders including the big four life insurers, the FSC, and the FPA.

We are all advocating for the retention of commissions, and we are all – as part of this process – doing our best to communicate to politicians about the challenges that the life insurance industry faces – and the fact that the policy settings need to be promoting and encouraging life insurance uptake, not discouraging it.

I spent two days in Canberra earlier this year with the CALI Group – [Choices & Access to Life Insurance] – talking with a range of politicians in preparation for the release of this report. This group is endeavouring to ensure that as many politicians as possible understand the issues in the life insurance market, and they understand the importance of commissions and giving access to advice to everyday Australians, who otherwise might end up in default cover that simply does not meet their needs.

Peter: It seems there are many voices but one message to Canberra.

Phil: Yes, there is one clear message about the importance of life insurance and the importance of having a choice for clients to pay for their advice via commissions.

Peter: Phil Anderson, thank you for your time.

Phil Anderson is the Acting CEO and General Manager – Policy & Professionalism at the Association of Financial Advisers. Phil is an experienced financial services executive with skills in financial advice, regulatory change, risk management, compliance, project management, operations and finance.


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