The Federal Treasury has released a Regulation Impact Statement which details the rationale behind its proposed FoFA amendments, and the potential impact on industry and consumers. The Statement also estimates the cost savings to industry from the changes to be $191.3 million each year.
In addressing the ban on commissions for life insurance inside superannuation, the Government confirmed it would lift the ban for risk products where personal financial advice is provided. This would mean that only automatically provided group-risk insurance within default superannuation funds would be commission-free.
The Government acknowledged that the amendment could have a range of impacts on consumers, and could still potentially lead to conflicted advice:
‘Some stakeholders argue that consumers who receive advice on group-risk insurance products within superannuation are currently subject to higher up-front fees due to the ban on commissions on such products. Removing the ban may reduce the up-front costs that consumers face and encourage more consumers to take-up insurance, which should assist in addressing the problem of underinsurance in Australia.’
…there is a risk that the advice provided to consumers may be influenced by the payment of commissions to advisers
The Statement continues: ‘Some consumer groups have raised concerns that allowing commissions on more types of life insurance policies could adversely affect member balances in the long term (as commissions may be greater than up-front fees). In addition, there is a risk that, despite the application of the best interests duty, the advice provided to consumers may be influenced by the payment of commissions to advisers.’
According to Government estimates, the removal of the ban on commissions for the majority of risk products will have no monetary impact on the industry. In contrast, by removing the retrospective aspect of Fee Disclosure Statements, the industry is expected to save $40.8 million each year.
The other major cost saving to come from the amendments is the removal of the opt-in requirement. The Government estimates this will save industry $76.9 million in implementation costs, and a further $45.1 million each year.
‘As the removal of opt-in would reduce costs for advisers, the amendment may result in lower costs to consumers. In addition, this amendment would eliminate the risk of consumers’ arrangements being inadvertently terminated due to them not responding to a request within 30 days (for example, due to being on holiday, being sick or simply forgetting),’ the Statement explained.
The Statement went on to say that the objective of the Government’s actions were to ‘…strike the right balance between investor protection, investor access to affordable high quality financial advice and correcting the current regulatory overreach.’
While the Government’s election commitment was to implement the 16 recommendations of the PJC Dissenting Report (see: Coalition Calls for Changes to FoFA, Issues Dissenting Report), the Statement explained that a number of the recommendations are no longer applicable, as changes have already been made to FoFA that achieve the objectives sought, or the recommendations are no longer relevant due to the passage of time.
The Government also advised that, where possible, the package of amendments would be implemented through regulations to ensure the changes are processed as soon as practicable. ‘To provide greater clarity and certainty for industry, some changes made through regulations would be subsequently amended through legislation,’ the Statement added.
