The Association of Financial Advisers (AFA) has called for the introduction of a common-sense test around clawback to prevent its application where policies may have been cancelled or premiums reduced outside the control of a financial adviser.
Reinforcing other recent public statements, the AFA made its latest call in its submission to Treasury regarding the Revised Life Insurance Remuneration Reform Regulations. In the submission the AFA also stated that clawback should apply to the servicing adviser if that differs from the adviser who originated any insurance cover.
In calling for a common-sense approach around clawback the AFA suggested the Regulations be altered to state that clawback ‘may occur’ in the first two years under certain circumstances but should not be applied due to a technicality within an insurer’s operational requirements, the terms of the policy changing, or subsequent changes in the insured’s circumstances.
“Clawback should sensibly and reasonably not be triggered where, despite the financial adviser complying with their obligations and for reasons beyond their control, the policy nevertheless ends or the premiums reduce,” the AFA stated.
“Clawback should sensibly and reasonably not be triggered…for reasons beyond their control…”
The Association added the most appropriate way for advisers and insurers to deal with other scenarios around clawback would be to allow the latter to have flexibility in applying additional common sense exemptions.
“This would make it clear that where a situation is reasonably not the fault of the adviser, that insurers have the option of applying common sense, and not unfairly clawing back remuneration,” the AFA said.
“Internal guidance could capture these examples over time, also building trust and confidence with advisers around which insurers extend fair treatment beyond the exemptions noted in the regulations,” the Association stated.
Clawback and Servicing Advisers
In calling for clawback obligations to remain with the servicing adviser the AFA stated that current practice allowed for adviser remuneration to be transferred to another recipient when an adviser moved to a different licensee, sold their client book, or sold or ceased to operate their business.
The Association added that risks and liabilities also transferred under these circumstances and this was recognised within the Future of Financial Advice (FoFA) regulations and thus should also be recognised within the clawback exemptions.
“We understand that the general rule is that the risks and liability are acquired with assets purchased, unless the parties state otherwise,” the AFA said.
“…the Regulations should clarify that responsibility rests with the servicing adviser (at the time of clawback)…”
“Accordingly, the AFA recommends that the Regulations should clarify that responsibility rests with the servicing adviser (at the time of clawback) unless agreed to otherwise by the parties,” it stated.
“Similar regulations were inserted into the Corporations Regulations to account during the FoFA changes for certainty around ongoing investment advice income. It would be fair to ensure that either those existing Regulations apply equally to ongoing life insurance advice income or insert new Regulations.”
Ongoing Benefits and Servicing Advisers
Following on from its call around clawback and servicing advisers the AFA also recommended that any changes to who receives a permitted ongoing commission should not be considered as a new arrangement.
This would include situations where an ongoing benefit was assigned to another adviser or licensee, or redirected by the product issuer to a new or another licensee, or where the person receiving the benefit from an employee representative to an authorised representative of a licensee.
The AFA stated these situations were covered under the FoFA remuneration framework which could be applied also to the regulations surrounding the changes to life insurance remuneration.