Last-minute negotiations continue on the final details that will attach to the proposed clawback provisions contained within the new Life Insurance Framework.
Riskinfo understands the Association of Financial Advisers is seeking exemptions on a number of circumstances which may otherwise be considered as a policy lapse and therefore subject to the proposed clawback rules.
AFA CEO, Brad Fox, has recently stated that a good starting point for considering what circumstances should be exempted from clawbacks within the Life Insurance Framework is ASIC’s statement in its October 2014 Review of Retail Life Insurance Advice (Report 413). Paragraph 111 in Report 413, which defines the types of lapses the regulator asked the life companies to exclude from its reporting for ASIC’s Review, states:
We do not consider the following examples to be policy lapses and asked insurers to exclude these policy events from their responses:
- (a) a claim on a policy;
- (b) a policy ceasing due to the insured person reaching a certain age (e.g. age 65);
- (c) a change in ownership of a policy from individual ownership to SMSF ownership, with the same underlying insured person and risk;
- (d) a policy being unconditionally reinstated on payment of an outstanding premium, after non-payment has occurred for a period of time;
- (e) a policy owner electing to discontinue one of the benefits the policy commenced with (e.g. the original policy had life, TPD and trauma cover, but the policy owner chooses to discontinue the trauma cover, while continuing with the life and TPD cover); and
- (f) one person under a policy that covers multiple people ceasing to be insured, but the policy remaining in force for the other person or people.
In addition to these exceptions, the AFA is seeking to ensure that no clawbacks should apply to policies cancelled inside three years that have experienced a premium increase outside of CPI or normal stepped premium increases.
The AFA has also called for lapses due to financial hardship, such as the loss of employment, to be exempted.
Mr Fox has argued that if the insurers do not have the systems in place to conduct the three year clawback on fair terms by excluding legitimate client-initiated lapses, then serious consideration should be given to shortening the responsibility period to two years: “The purpose of the three year clawback was always said to be to prevent inappropriate replacement of products by the same adviser, so its application should be restricted to those instances only. If that can’t be achieved by the insurers, then they will need to consider whether the clawback period should be reduced,” said Mr Fox.
Brad – please stop negotiating for advisers!! The current 1 year clawback covered these points already (and claims were already exempt even within the first year!).
This should have been a negotiation with the insurers based on either reduced commission OR higher clawback periods – NOT BOTH !! It should have been about challenging flawed data and standing up for your members.
Why are you not taking a tougher stance like the AIOFP are when your entire membership disagrees with you??
Why is the AFA not in discussion with ACCC based on what could not be more obvious as unfair trading restrictions, coercion and blatant tactics to reduce competition and increase profits by the banks and insurers?
Maybe it is time to step aside and find a new leader who can sort out this mess before its too late??
The Hon Tony Abbott
MP Prime Minister of Australia.
Mr Abbott, I am writing this letter to you as a last resort.
I have been in the Financial Services Industry for some 48
years which represents my whole working life since finishing school at the age
of 17 years.
During this period my Industry has been confronted with
constant change, change which has in the main made our Industry a better one
and more able to assist the needs of our clients to secure their futures and
the futures of their families in the event of an “unforeseen” event occurring.
As a result of a combined 74 years in our Industry my wife
Regina and I have had millions of dollars paid in insurance claims. This
represents monies that the Government has not had to pay out by way of welfare
payments and more importantly has provided security to both businesses and
families. In some instances the payment of insurance benefits to businesses may
well have meant the difference between their survival or otherwise.
As you are aware on the 25th June 2015 the outcomes of the Review of Retail Life Insurance advice were released. It is
fair to say that whilst our Industry expected far reaching changes (as these had
been telegraphed by Mr. John Trowbridge) the proposed changes have rocked the
foundations of our Industry which is made up of thousands of small business
owners to such an extent that our Industry is now fragmented and in my view in
danger of imploding.
Part of the reform proposals is to reduce
“upfront” commissions by approximately 50% in the belief that high
upfront commissions represent conflicted remuneration. This is a very significant change but one which
has generally been accepted by the Industry as necessary.
The most significant reform proposal (effective 1 January
2016) and the one which has led to the angst and fragmentation is the issue of
a “3 year responsibility period”. Our Industry has operated for in
excess of 20 years with a one year responsibility period. The new reform is
totally unworkable; it is not commercially viable and was NOT a recommendation from Mr John Trowbridge who saw no reason for
a change away from a one year responsibility period.
The “3 year responsibility period” represents an
impediment to the survival of advisers in our Industry who are small business
people providing such a valuable service to the community. This proposed reform
flies in the face of the “clients best interests” as a 200% increase in the
responsibility period, limits an advisers ability to make changes that are
necessary for the client because of financial impost to the adviser. The advice
process will grind to a holt. No business (in any profession) can survive let
alone prosper with a 3 year contingent liability over the business.
My background in my Industry has involved me contracting as
General Manager of two Public Companies overseeing the Financial Services
distribution. With this background and as a practitioner, I understand the
implications of these reforms and have grave concerns for the well being of
advisers. I am also cognizant of the potential cost to your Government and
future governments through what will almost certainly be a dramatic drop in
financial services advice as a direct result of these proposed reforms.
Underinsurance in Australia is already a major concern and will be exacerbated
further.
Mr Abbott, I implore you to intervene in this very important
matter with a view to the maintenance of a one year responsibility period.
Roger, that letter sums it up and thank you for taking the time to put down in words what took decades of experiance to learn.
We can only hope the Prime Minister has the ability to understand and realise the implications of what you said, as it is not just us, it is all Australians that will be negatively impacted if the Life Industry cannot see what is so blindingly obvious and continues with their short term fix and long term disasterous strategy for short term profits, that will disappear within 3 years if implemented and cost Taxpayers Billions in unnecessary support to incapacitated Australians.
Thanks Jeremy for your comments
Sensible, well-reasoned comments which come (often) only with maturity, Roger. Yes, I suppose we’ll have to accept the cuts in commissions even if we don’t agree with them. Why can’t the status quo continue? What choice do we have in this though? A 3-year write-back is totally unacceptable for anyone, anywhere. It effectively means we don’t have a guarantee of income from, as an example,
31 December 2015 until 31 December 2018. Truly frightening.
Sadly, your wise words will fall on deaf ears. Politicians work under the auspices and agendas of big business it seems, so with that kind of relationship in place our chances of making any headway in this are near-zero.
Spot on Roger. I think the industry in general has accepted there will be a large reduction in up front commission and most of us can manage that. What most of us can’t manage is the 3 year claw back. Not every financial planner has a huge client base and ongoing income that can absorb an insurer taking back thousands of dollars (which has long been spent) for work that was done years ago. The one other thing that I can’t believe no one is talking about is that it is not in the client’s best interest to pay fee for service for insurance. For the same cost, they get a smaller tax deduction.
Unfortunately I don’t know if anyone other than planners read these forums. We are at the mercy of those who don’t appear to know or care.
John Fletcher CFP
Totally agree Fletch. We really are at the mercy of those who don’t appear to know and/or just don’t care.
It’s almost like the Risk Advisers are soldiers fighting at the front lines of the battle while the insurers, lobbyists, FSC, etc – are all back at headquarters with their feet up. They don’t understand how serious things are on the front lines simply because the battle hasn’t reached them yet. But if the soldiers don’t get the support they desperately need, then the battle will ultimately reach headquarters. And then?
Well it may be too late…..
Brad when will you understand that NO means NO. NO to a 3 year responsibility period. NO to a 2 year responsibility period and yes (reluctantly) to reduced upfront commissions within reason.
@ reality check
You are absolutely correct with your comments !!!
The Brad Foxes and Mark Rantall’s of this world … just don’t get it.
I’m not an AFA member but I am a CFP and therefore a reluctant member of the FPA.
We have the same issue with our so called leadership.
The 3 year clawback provision is a nonsense. No one will be willing to write business under those terms…. nor will Licensees be willing to pick up the contingent liability, should advisers leave one License for another or leave the industry altogether.
Along with the exemptions that Brad Fox has raised, you should also look at client’s changing circumstances in relation to lapses/cancellations.
For instance, what happens when clients change jobs and the new employer offers so called free insurance cover. Do you think anyone is going to pay for something that their employer will now pay for on their behalf via employment terms ? Not likely !!
What happens when divorce happens ?
The first financial casualty following the division of assets is to cancel some or all insurances.
Could someone in these lofty positions explain how an adviser should be responsible for any of that ?
This mess including commissions could have easily been resolved.
The pretext for change is based on systematic “churning”… but it’s all anecdotal !!
The law requires all advisers to disclose to clients the benefits won and lost as a result of changing insurance providers..
Life companies know who the “churners” and choose to turn a blind eye, and are willing to accept the recycled business from them.
The only reason, the FSC hasn’t addressed this issue is because most of their members are complicit in this exercise and the adviser is a much easier target
Perhaps rather than hammer the whole adviser industry why not just identify the “churners” for what they were and deal with them accordingly.
It couldn’t have been that hard really !!!
Perhaps we could link all Insurance policies to peoples TFN, then use some data matching to identify those TFN’s that seem to be transferred between Insurers regularly, thus identifying potential churn – at which point the Adviser, Licensee and/or ASIC are notified. The Adviser could then provide a “please explain” to the relevant ppl….
It’s funny how Brad Fox, a man who built his business on commission only risk, investment and cash products, thinks he is the best person to speak for Advisers. He is a hypocrite and the spokesperson for a hypocritical organisation who is almost solely sponsored by the institutions that benefit most from these reforms!
These reforms are all about making big business more profitable at the expense of small business.
If their real concern is the ‘churners’ wouldn’t it be better to police the industry properly rather than whack all advisers with the same big stick? That would make more sense but it doesn’t improve institutional profits.
What’s really a bigger issue, churning or vertical integration? I’m only guessing but I’d imagine more poor advice and churning has come from VI and institutional ‘sales target’ based advice than anything else.
Angry, I encourage you to call me personally and discuss your views. Opinions and facts shouldn’t be confused. You are wrong about my former business, and you are wrong about the AFA’s relationships with product partners. Let’s talk.
Brad, you have worked tirelessly trying to negotiate in a bureaucratic jungle full of self interest groups who may have been present in meetings, though had their ears attuned to a story they prefer to hear.
Yours is a thankless task and you should be admired for what you have tried to achieve, though you probably have realised now, after all you have been through, that honesty, integrity and a convincing argument is a waste of time in Canberra, when large vested interest lobby groups, with their ear to ministers are chasing their own agenda’s.
One thing even our Government cannot do is lie or try and use information that is not truthful or relevent and the AFA has the right to DEMAND, NOT ASK, for rules and systems going forward, based on correct data that to date, has not been forthcoming.
Brad do not make the mistake that you have to abide by anything Josh Frydenberg or any Public Servant says or wants, if they are wrong.
It is not a matter of debating, it is a matter of demanding what all of us are entitled to, which is a fair system that is based on the truth.
If you want to earn the respect of all parties, do not veer from that path.
Brad, your position is unenviable. I would like to thank you and your team for your efforts to date, however the AFA’s position must be made clear and in no uncertain terms in relation to 3 Year Clawback. We MUST know how Best Interests Duty is going to interact with Clawback. Surely any reference to “Churn” MUST be matched off against the clients Best Interests. This is the perfect opportunity to out them (FSC) and demonstrate that the 3 Year Clawback is nothing to do with improving the quality of advice and discouraging INAPPROPRIATE “Churning” of clients policies. This was the whole basis of ASIC’s report. If an insurer believes that an adviser has inappropriately “Churned” a policy, report them to ASIC. If all the boxes can be ticked on ASICS life insurance replacement checklist, what is the problem? Let’s actually hear the insurers come out and SAY it. “The 3 Year CLAWBACK provisions are not about improving the advice outcomes for Australians, they are about increasing our profits”. An alternative win/win/win may be for Insurers not to pay more than Level Commissions for business placed/replaced under the “General Advice Provisions”. If advice costs money, and clients are better off for receiving advice than the upfront costs should be compensated for. If no advice being provided (either by VI model or Direct/Robo) then no upfront commission payable. Simple. Since general advice direct/robo channel likely to fall over at 1st anniversary, no long trail to commit to for the insurer, no large upfronts to clawback. If the Direct/Robo channels want to earn more on upfronts, make them provide retail replacement advice and be accountable to ASIC AND THE CLIENT when something goes wrong for the client at claim time.
Really Brad you want to talk to us ? do you Ive never ever seen a paper discussion that has it down from an advisers point of view as a 35 year veteran I can tell you this is the time to stand up and shine
At the AFA roadshow last week it would have been time better spent asking for feedback from the advisers on scenarios that a client cancels, which could be presented to the relevant bodies and a solution presented, rather than having 40 minutes delving into our thought patterns on how to adapt to change.
There was little time left for discussion and once again it seemed that the Advisers reason for being there was to be told what we should think and do, rather than ask for Adviser consultation and to listen to their thoughts, as there was a vast amount of experiance in the Sydney room and in the break many great ideas spoken, though alas, only to the converted.
What are the exemptions the AFA are asking for and why have they not clearly spelt them out and asked for adviser feedback and suggestions of real life reasons for cancellations.
There is an easy and workable solution to the proposed commission and claw back changes.
STARVE THE INSURANCE COMPANIES OF INFLOWS… LIVE ON YOUR TRAIL AND WATCH INSURERS AND GOV’T SQUIRM OVER THEIR POOR POLICY…
I really don’t understand why AFA is negotiating at all on 3 year clawback? In the AFA roadshow Brad Fox made it fairly clear that the media and consumer organisations are twisting the goverment’s arm on commission reductions, and the govt is too politically weak to stand up to their errors and misrepresentations. So unfortunately the AFA has a gun to their head on commission negotioations.
But why would the govt care about 3 year clawback? That is not a media or consumer group issue. It is purely an FSC issue. Churn has always been easily solvable by the insurers agreeing not to accept churned business and not getting into an “arms race” on minor policy differences. And now there is an overarching legal barrier to churn, with the recent introduction of Best Interests Duty.
I don’t understand why Frydenberg isn’t saying to the FSC “Why are we overcomplicating this whole thing with additional clawback conditions. It’s not essential for me politically, and it’s not essential for you financially.”
Brad,
Mate you are not representing advisers, you are just going along for the ride. I am not (I recall is the 3rd time in 33 years in the industry) attending the AFA Annual Conference to listen to you tell everyone what you have done for us. As I said in a recent post the 60% advisers will not survive unless their Dealership is throwing some real dough at their Dealership costs. I have been on a 60% Dealer split for 8 years the average yearly contribution from my little business has been $275,000 or $2.2 million. My Dealer thankfully was subsidising the costs thankfully, not all but a lot. Brad you say how great it is well some costs will have to go and one of mine will be the AFA annual Fee.
with those figures being retained by Life Offices, they will make a killing yet still deliver crap service. AMP waiting 29minutes to get a real person. Pre assessments taking so long to get an answer back. so now we should start charging the Life Offices for what we do for clients.
@ Roger Smith,
Smithy you know me well from our past and if I make reference to a “gathering at the MCG”, you’ll know who I am, in fact I took you to dinner in Tony Abbott’s electorate.
Your letter to the PM is noble but I don’t think it will have the desired effect.
We need to mobllise… just like a union would. !!,
At the moment we are a collective of individuals that are easily picked off by those who have a different agenda.
We unfortunately have put our faith in the AFA & the FPA but they have shown that when it comes representing all the “rank and file”, they lack the intestinal fortitude to take on the fight for their members.
We need to do what the Industry funds did to try and destroy the financial planning industry with their dishonest “Compare the Pair” campaign.
We need to take on an advertising campaign that illustrates the value of what we do, the true picture of how the bulk of the industry behaves and highlight that if there are systemic “churners” in our ranks some members of the FSC are complicit in that arrangement and should be outed.
The question and the message the government and the public need to hear is, … Do they want to pay more for something that otherwise would cost them less under the present commission arrangement.
Would they find it acceptable to have someone recoup their earnings at any time over the next 3 years, even if they worked for someone, just because they could, if for some reason that arrangement was terminated.
I’m sure if a fighting fund was established with a minimum contribution of $1000 from each adviser, you would get a more than adequate level of takers.
Brad why don’t we all stop writing financial products for 3 weeks and lets see them crawl back but no you don’t have the heart to do that, the industry could bring the Government to its knees and refuse to process any financial transactions in the favour of the Government, that would bring them back to the table, and Insurance companies cutting the hand off that feeds you, good luck I hope you all choke on it.
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