Financial advisers will be subject to a flat commission payment of 20% on life insurance advice, if recommendations handed down by John Trowbridge are implemented.
The maximum 20% level commission proposal is one of a series of recommendations released by Mr Trowbridge, following his consultation process with the joint Financial Services Council/Association of Financial Advisers Life Insurance and Advice Working Group (LIAWG).
Mr Trowbridge said it is critical that the remuneration of advisers and licensees be restructured, in order to minimise conflicts of interest. He has also recommended that:
- The level commission model be supported with an initial advice payment (IAP) not exceeding $1,200 per customer, paid by the insurer
- For annual premiums below $2,000, the IAP is to be no more than 60% of the first year’s premiums
- The IAP only be available on advised business
- The IAP can only be paid once unless at least five years have passed and the customer takes out new policies
it is critical that the remuneration of advisers and licensees be restructured, in order to minimise conflicts of interest
In his report, Mr Trowbridge explained that the IAP is intended to address the problem of churn, because it will mean that when new policies are written for existing advised clients, no payments beyond the level commission are made until at least five years after the last IAP was paid.
“Misaligned incentives that have been found to influence the quality of life insurance advice require urgent attention. It is up to the industry to take the initiative to respond positively to these recommendations,” he said.
Mr Trowbridge’s model includes 11 recommendations, including that the changes be reviewed in 2020.
“This suite of recommendations is designed to achieve improved alignment of interests, including the removal of conflicts over remuneration and advice, along with productivity gains in the life insurance and advice sectors.
“The recommendations need to be adopted as a package to achieve the transformation needed for the advice and life insurance industries,” Mr Trowbridge said.
Other key recommendations:
- Licensees be prohibited from receiving benefits from insurers that might influence recommended product choices or the advice given by the licensees’ representatives
- Licensees be obliged to include at least half of the 13 retail life insurance providers on their Approved Product List
- Licensees and advisers to re-examine the advice process to improve client engagement and streamline Statements of Advice (SoA)
- The life insurance industry develop a code of practice similar to those in the general insurance and banking sectors, aimed at setting standards of best practice for insurers, licensees and advisers
Mr Trowbridge has proposed a three year transition period between the current remuneration arrangements and the new model. During this time, he believes the five year rule should be applied on a ‘best endeavours basis’ immediately, and from a suitable date in 2016, for a period of two years, the industry operate according to the current hybrid commission arrangements, with a cap on initial commissions.
“Bringing systemic and cultural change to fruition is no small task,” acknowledged Mr Trowbridge. “It will involve modifying industry structure and behaviours that will require industry commitment and investment in transition planning.
“Ultimately the recommendations in my report represent an integrated package of reforms that, taken as a whole, can deliver a more competitive industry with more consumers who are better advised and better protected by their life insurances.”
To view a copy of the final report, click here.