United Kingdom regulators recently reversed their policy on banning risk commissions because risk commissions were determined not to represent a conflict of interest.
Well-regarded UK insurance expert and advocate, Nick Kirwan, who represents the Association of British Insurers (ABI) has been in touch with riskinfo to outline the rationale behind the decision of the UK authorities to allow the continuation of risk commissions:
The ‘Retail Distribution Review’ RDR (the UK version of FoFA) comes into effect in 2012.
It bans commissions on all investment business. However, it has now been agreed not to ban risk commissions although there will be some additional disclosure requirements where investments and risk business are arranged together.
The key argument was that, for risk business only, commissions are clearly aligned to the consumer interest…
The key argument was that, for risk business only, commissions are clearly aligned to the consumer interest. Advisers get a clawback if the customer lapses the policy – this means the adviser has a vested financial interest in ensuring that the customer is satisfied with their purchase over time.
The same cannot be said of commissions on lump sum investments which are fully earned up-front. Against this, the regulator identified no consumer detriment from risk commissions and the industry (ABI) presented clear consumer research evidence that consumers will not pay fees for risk advice.
Within Australia, Mr Kirwan urges consultation and engagement with the Federal Treasury:
“… I hope the industry is fully engaged with the Treasury because the argument is too important to be decided without a clear understanding of all the wider issues – including the impact on the degree of under-insurance.”
Memo to the Australian government : The Brits realised they got it wrong so have now reversed their original decision so you can follow their lead by leaving our current system alone and not stuffing it up like they tried to!
Hoorah! Lets just see if the powers that govern this country actually take some notice from this article and the lessons that have been learnt in the UK market. Hindsight is a wonderful thing – properly understanding ALL the mechanics of what risk insurance advisers do – and how WE focus on the needs of our clients, as opposed to simply speculating, would be the best first step in my opinion.
How shortsighted is this govt, havent they learnt from the failure of this approach in the UK
Finally, a article which isnt biased towards the Industry Funds or written by so called “experts” who havent a clue what we do as risk advisers.
I heard that the UK reversed the decision the other day. The risk (insurance) industry is very different to the investment & superannuation industry. People are price sensitive, increasingly more with the price of living and tightening family budget. So many cancel or make modifications to their policies all the time in order to reduce the premium. The reality is that people claim for benefits and cancel policies which all cease the commission (adviser service fee) payments from an insurer.
I hope the labor government learn from the UK experience and understand that the payment of commission on insurance products does not create a conflict of interest as most companies pay similar commissions, so it does not bias the insurance company advisers recommend. It rewards advisers for providing valuable advice and recommending appropriate products that meet our clients needs, that clients would otherwise not obtain. Hence Australia would have an even greater underinsurance problem than we already have.
I think the only conflict of interest is with the gov’t.Don’t forget minister Shorten is a former board member of an industry fund and union boss.We can only hope that commonsense will prevail and the right decision is made in the interests of ALL involved.
I am so pleased to see that sense is starting to prevail and filtering through to Australia.
Further, I am also happy that I have stuck to my business when so many others have felt that they have had to walk the plank or just jumped ship.
SAVE OUR INDUSTRY: Every adviser, pls send a copy (or multiple copies) of this article to your state and federal member of parliament. This issue is TOO IMPORTANT to just sit on your Butt and think someone else will do it for you. TAKE RESPONSIBILITY FOR YOUR OWN LIFE AND INDUSTRY. DO IT TODAY. PLEASE !!!
From a client point of view, ain’t the customer and his and her potential beneficiaries lucky, that they can now go about purchasing protection without having to have to pay anything but the premiums ?
Some common sense in the debate…..AT LAST !!!!!
Its refreshing to see that a valid argument was able to be supported by fact and validated,then taken into consideration in the decision making process in the UK.
One hopes that our Govt will be able to address this issue from the consumers perspective which we all know – and that is:
1. The average guy in the street will think adequate cover exists within their super,and would not be able to afford to pay for an advisor even if they wanted advice, thus relying on cover within super which is limited by its very nature.
2. The average business person will seek advice and pay for some of the time needed to set up appropriate cover, but probably not all, hence may not receive the best advice.
3. High earners will win the day yet again – pay for good advice and have appropriate cover.
As I see it the “left” would then be punishing the very people they proport to represent, under the banner of “see – we have banned commissions on insurance sales – now isn’t that a great outcome for the public”… we don’t need more spin with adverse hidden implications!
I hope the Feds make a fair assessment of the implications of banning commission instead of working on what the “public think they want” in this instance.
My view is make all commissions payable at the same rates, Hybrid and Level – ban upfronts altogether. This will assist to weed out the sharks and promote good advice and long term service to clients, so the advisors interested in building their businesses will prevail.
A big thankyou to RISKINFO for putting the magazine and this online forum together, that has allowed all participants to clearly see,analyse and debate the important issues around our Industry.
The structure and layout has had clarity,is easy to understand,with a intelligent approach to the difficult and sometimes, onerous subjects being discussed.
Keep up the great work you are doing and on behalf of every Adviser who has an interest in the future,thankyou.
This position on reversing commission bans in the UK has been known for sometime. But do you think our gutless incompetent politicians will come out and make a clear statement on risk commission remuneration so as to give us some certainty and let us get on with the business of protecting under insured Australians?? Don’t think so, we have a policy vacuum currently in Canberra. But hey, just wait until the greens get control of the Senate, anything is likely to happen. Anyway as I have said before, we need to get rid of the word “commission” as it has been turned toxic and call our remuneration an adviser “implementation fee” and “review fee” paid by the insurance companies direct. Let’s just do it, most of our clients couldn’t give a damn.
After the GFC all the major regulatory bodies around the world (SEC – US, ASIC – Australia, FSA – UK, etc.) got together to try and determine what rules needed to be changed to prevent future excesses such as the sub prime debacle in the US. Everything was put on the table including life insurance commissions (remember AIG had to be rescued by the US taxpayer). The ALP therefore jumped at the chance to look at banning life insurance commissions as part of their reforms for the financial planning sector! However as I have argued in previous comments, for over 300 hundred years there have never been any systemic misselling scandals in the life insurance market; so there is just no justification for a ban! The potential to ban commissions has always been driven by ideology! Now there is a credible source (the UK regulator) who having looked at the issue says there is no problem. If the Labor party doesn’t take this as evidence that there is no need to change the current remuneration model then we know they have a bias against our sector. That is why I have argued that all financial planners in Tony Windsor’s and Rob Oakeshott’s electorates need to see their local member ASAP to prevent this purported vile legislation being passed by federal parliament. I have asked the AFA and the FPA to lobby very hard against the proposed change and for the life companies to do the same! Hopefully they are working behind the scenes on our behalf. The battle isn’t over yet. We should also get the opposition to state that if they win government and a commission ban is in place it will be overturned by them just like the ALP overturned work choices when they won government in 2007. Misguided politicians with a hidden agenda shouldn’t be allowed to destroy our livelihood without a fight. The unions are always good at fighting their battles we should as well. In 1974 when the Whitlam government proposed a national super scheme the Life companies got their staff to march in the streets to stop it. The proposal never got up! We should be able to do the same on this issue.
Good to see common sense prevail. As a risk/insurance only adviser in our industry, its hard enough trying to convince people to commit to paying premiums initially and then every year. On top of that there is the number of claims we process for people due to illness, disability or death. Our industry is so very different to the investment/superannuation environment.
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