LIF Outcomes to be Decided in 2018 ASIC Review

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While the life insurance sector has been given three years to transition to the Life Insurance Framework (LIF), it may only have the next two years in which to demonstrate the reforms are actually reducing churn-related behaviour.

Assistant Treasurer, Kelly O'Dwyer
Assistant Treasurer, Kelly O’Dwyer

According to recent statements made by Assistant Treasurer, Kelly O’Dwyer, the Government will determine its position on the future of adviser remuneration in 2018, a full year before the end of the LIF transition period, when it conducts a review into the impact of the reforms.

This review will be informed by reporting the Government will receive from the Australian Securities and Investments Commission (ASIC) on trends in life policy lapses and retention levels following the commencement of the transition period from 1 July 2016.

In releasing the draft legislation on 3 December, O’Dwyer stated that “ASIC will undertake a review of the reforms in 2018 and that if this review does not identify significant improvement the Government will move to mandate level commissions, as recommended in the Murray Inquiry report”.

These comments are consistent with those made during the Government’s response to the Financial System Inquiry in late October and when announcing the reduction of clawback from three-years to two-years in early November, and are also included in the Explanatory Memorandum to the Draft Legislation.

ASIC to Control Commission Flows

An examination of the Explanatory Memorandum to the draft legislation indicates that ASIC will not only have a role in reviewing the sector but in controlling the flow of upfront, ongoing and level commissions to advisers.

This will happen as the LIF legislation – titled the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2015 – will effectively remove the exemption to the ban on conflicted remuneration for benefits paid in relation to certain life risk insurance products, that is commissions and volume based payments.

At the same time the Bill will amend the Corporations Act 2001 to give ASIC the power to specify, via a legislative instrument:

  • the criteria under with life insurance products would be exempt from the ban on conflicted remuneration
  • the maximum level of upfront and ongoing commission an adviser would receive
  • the level of clawback where applicable
  • the payment of level commissions.

Churn Under LIF Already Defined by ASIC

In terms of gathering data for a 2018 review ASIC is already empowered under the Corporations Act to be able to request data on a regular basis from financial services licensees and is likely to take a similar stance on lapse and churn as it did during the creation of Report 413: Review of retail life insurance advice last year.

Speaking at an Australian Risk Advisers/riskinfo Professional Development Day in September,  ASIC Senior Executive Leader – Financial Advisers, Louise Macaulay said the regulator was focused on the best interest of a client when considering if an insurance policy had been churned.

“…We have got quite a blunt definition of churn in the sense we are looking for when it is not in the best interest of a client…”

“From our perspective when we see a client moved into a new insurance policy and it is not in their best interest then we think that is a problem, and the colloquial reference to it is churn. In our report that we did on life insurance we did not use the word churn but we talked about situations where it was not in the best interests of the client to be put into a new policy,” Macaulay said.

“I understand there are issues around lapse and it is difficult to define that, but we have got quite a blunt definition of churn in the sense we are looking for when it is not in the best interest of a client. There can be a grey area when moving a client to a new policy and whether it is or isn’t in their best interest but we are way over on the side where it clearly is not in their best interest.”



4 COMMENTS

  1. It appears ASIC has a different interpretation of what churn is, compared to the FSC
    interpretation.

    ASIC states churn has a direct correlation to best interest, whereas the FSC, seems
    to have a simpler view and that is, if a policy premium reduces for any reason apart from a claim, then it is a lapsed policy.

    I have heard that it has become so ridiculous that even if a client declines indexation, that will be included as part of the calculations for lapses.

    We seem to have gone full circle and are back to the beginning of this debate.

    Surely now the AFA and FPA can start to question how Life Companies are determining
    their calculations and in what format is data being collected and passed to ASIC.

    Advisers have been asking these questions for years with no response, so it would be
    nice if the associations did their job and use ASIC’s interpretation of churn, then query the Life Companies data and attack the FSC assumptions, who have promoted action against all advisers, based on mistruths.

    I invited Chris Bowen on 30/06/2010 to come to our office to see the real world of professional Life Insurance advice, when the future of advice submissions around commissions were being asked for back then.

    It has always rightly been what is in the best interest of clients, though the FSC has
    hijacked the debate to what is in the best interests of its members.

    The unfortunate thing for all concerned, is the FSC has little understanding of the retail Life Insurance Industry and are creating massive long term problems for all Australians, not solutions.

  2. Thankfully, ASIC has now provided an appropriate and accurate definition of churn –
    anything that is not in the client’s best interests. This is exactly what advisers have been stating in previous articles of Risk Info.
    The head of a large, Australia wide distribution network was quoted as saying that
    anything that is not a claim is churn. Yet ASIC’s statement thankfully, contradicts that
    nonsense.
    So insurers and other lobbyists, please note that according to ASIC – a policy
    lapsing because insurers have increased the premium dramatically is NOT a
    churn; a policy switch to a cheaper premium with the same or better quality
    cover is NOT a churn; a policyholder not accepting a CPI increase is NOT a
    churn…and so on.

  3. The devil will be in the detail but this may well be a great outcome if indeed clawback provisions can only be tied to a policy churned that does not meet the clients best interest. I have my doubts though…more likely clawback will apply regardless of whether was in clients best interest, but hey, the good news is ASIC wont label us as churners, rather we will be benevolent volunteer workers, unless of course we’ve managed to convince our clients to pay a fee on top of the premium.

  4. I hope ASIC has the good sense to completely ignore any life insurance company’s,( or the FSC’s ), “assistance” in providing adviser names, policy numbers etc in their quest to determine ‘churn’. The best way to proceed is for them to go directly to dealer groups. Maybe they will find policies are being moved in the best interests of clients ( what we have been saying all along ); and if there is any wrongdoing it is a “training issue” and needs to be addressed with that individual. The remedy for that is not to slash ALL adviser’s income. Sanity may prevail in the end. I hope so.

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