Royal Commission Flawed Rationale on Risk Commissions?

The Banking Royal Commission has recommended that the current cap on life insurance commissions should eventually reduce to zero, unless there is clear justification for retaining those commissions. But is the basis of this recommendation flawed?

As Riskinfo has already reported (click here), the future of life insurance commissions is in doubt following the release of the Banking Royal Commission’s recommendations, in which recommendation 2.5 reads:

When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero.

Commissioner Hayne’s rationale in arriving at this conclusion is also outlined within his final report, in which he noted that many submissions following the release of his interim report advocated that current regulatory reform should be given an opportunity to run its course, ie the Life Insurance Framework reforms, which will be subject to ASIC’s post-implementation review in 2021.

The Commissioner, however, also expressed his doubt that a total ban on risk commissions would have much of an impact on underinsurance levels:

“I doubt that a complete ban on conflicted remuneration in respect of life insurance products would lead to significant underinsurance.”

“I doubt that a complete ban on conflicted remuneration in respect of life insurance products would lead to significant underinsurance.”

Given his view of the levels of life insurance held by Australians inside the superannuation system, Commissioner Hayne added, “I am not convinced that a move away from commissions for life insurance products would see large numbers of Australians without an appropriate level of life insurance.”

In acknowledging that there may be some benefit in the industry delaying any further changes to life insurance commission levels until it has had an opportunity to assess the impact of the Life Insurance Framework reforms and other changes in the next few years, the Commissioner added on page 188 of his report:

“I encourage ASIC to take all necessary steps to ensure that it conducts its post-implementation review in 2021 as expeditiously as possible. If that review indicates that the cap on commissions has not contributed (or, at least, not significantly contributed) to underinsurance, then I would urge ASIC to continue reducing the cap – ultimately, to zero. Unless the reduction in life insurance commissions can be shown to contribute significantly to underinsurance, I can see no justification for allowing this form of conflicted remuneration to continue to be paid.”

Riskinfo notes the Government’s Life Insurance Framework reforms, which cap risk commissions and apply a two-year claw-back period, were predicated entirely on addressing the quality of life insurance advice to consumers, following ASIC’s Report 413, rather than issues related to the level of underinsurance. Commissioner Hayne, however, has linked risk commission structures with underinsurance levels, rather than with the quality of life insurance advice solutions for consumers.

If the ASIC post-LIF implementation review in 2021 establishes that the quality of life insurance advice accessed by consumers has improved, will it consider this to be a reasonable justification to retain risk commissions – as the balance between consumer best interests, conflicted remuneration and a viable retail life insurance advice environment continues to challenge all stakeholders?

Click here to access the Final Report into Misconduct in the Banking, Superannuation and Financial Services Industry.

  • Ben

    Did commissioner Hayne explain how reducing commissions to zero, thereby eliminating the major distribution network for the insurers will not affect the underinsurance problem.

    All independent riskies will cease to write business because we can’t work for free and clients won’t pay the cost we would need to charge to comply with all the further regulation and remain in business.

    I really cannot see any way that removing risk advisers from the insurance process will do anything other than further exacerbate the under insurance problem.

    Does he even understand the difference between personal tailored advice and general advice?

    Does he understand that the default insurance provided in super is often worthless and almost always insufficient.

    Does he think that risk advisers are going to go back to university (after 30 years advising clients) to study a course which will teach them nothing to have their livelihood ruined.

    Insurance advice was already under extreme pressure. No commissions will be the end of it.

    Does he understand that ALL THE PROBLEMS WITH INSURANCE UNCOVERED IN THE RC related to general advice insurance.

    • emkay

      There is proof in both Netherlands and UK that no commissions is an unmitigated failure. Politicians are too blinded by polls to bother to look for the truth.

  • Do some more research

    Does commissioner Hayne consider a 35 year old with a wife, 3 kids and $1 million debt who joins an industry super fund and gets given $100k default life insurance to be underinsured or does he think this is adequate?
    Who is going to help clients with claims? The ongoing commission covers our costs for claims handling and we have massive examples of claims that would never have been paid if we did not go in to fight for the client against the insurer

    • CAFS from WA

      He and all his likeminded cronies really dont give a damn. You answered your own question – “industry super fund” “default life insurance”. Imagine if Independent Advisers didn’t exist. What other options would average Australians have to be covered? More default cover – more kickbacks from the product providers. More $$$ for ISF’s and more to donate to the ALP coffers. Very simple really.

  • jaseandrew

    So many people’s futures and livelihoods impacted by the interpretations of one man. That’s my biggest take out from this. Almost seems medieval. But hey don’t complain, back to work serf.

  • Concerned

    I refer to the last 2 paragraphs above. RiskInfo has correctly asked the question that “if the ASIC post-LIF implementation review in 2021 establishes that the quality of life insurance advice accessed by consumers has improved, will it consider this to be a reasonable justification to retain risk commissions?” A question I have – and what concerns me – is how
    ASIC will determine whether the quality of advice has improved? Remember that their audit late 2014 was flawed – i.e. they looked at a handful of advisers they already had a problem with, not to mention most passed their audit, and yet they tarnished all advisers with the same brush which has ultimately led to this unbelievable mess (LIF)! Because their past performance is anything but laudable, how can they be trusted to conduct a fair and unbiased review in 2021?

  • Phil Smith

    To use conflict of interest as a valid argument to cease ALL [particularly ONGOING] commissions is simply ridiculous. The issue has always been around initial [i.e. ‘upfront’] commissions. The tiresome ‘churn’ debate being the main driver. At the time, even Bill ‘Leftie’ Shorten stated level commission was acceptable. It was also exempted from the 2 year write back provisions. For Mr. Hayne to now even ‘suggest’ eventual reduction to zero commission is utter nonsense. Paying any of us 5,10 or 20% ongoing ‘servicing’ commission [as I like to call it] has absolutely nothing to do with ‘conflict of interest’. Old Riskies like me are akin to GI brokers NOT mortgage brokers. We provide ONGOING service & support to our clients, especially at claim time. Having chosen to take hybrid commissions since 1993 – to now potentially penalise me for this long term strategy is unfair & totally unfounded. Mr. Hayne, it is morally reprehensible to ‘punish’ me for making a wise business decision 25+ years ago – by taking away my 20% servicing commission.

    • Squeaky_1

      Hi Phil, I don’t think there’s been mention of ongoing insurance trails has there? They only seem to be harping on about the “grandfathered commissions” which I understand to be from super and investments. Am I on the right track?

      • Phil Smith

        2.5 of his Report [ASIC will still have the final decision in the matter of what commission will or will not be payable from 2021 onwards] that if there is no demonstrable evidence that continuing to pay commissions delivers a significant reduction in under insurance [in Australia] he recommends all commission be removed [i..e reduce to ‘zero’]. Do you think ASIC will make the right decision when it reviews commissions after 31/12/2020? We can only hope & pray.

  • Jeremy Wright

    Hayne’s comments prove what we have been saying for years.

    He, all the regulators, the Government and even the FPA do not understand the complexities and the Australian public’s perception, knowledge or even interest in the Life Insurance advice area.

    His views, also highlights his total lack of knowledge on insurance contracts, policy definitions and everything that relates to the Life Insurance Industry.

    Yet, we continually treat him and all the other clueless people with respect they do
    not deserve when they make stupid comments or put into play, regulations that will do the opposite of their stated goals.

    You know we have a major problem and Hayne definitely got it wrong, when the stock
    market gives the Banks their biggest share price rally in years, after reading what the Hayne solution is.

    The purpose of the Royal Commission was to bring the major Banks into line and
    punish them for their disgraceful behaviour.

    Instead, Hayne has recommended that the Banks competitors be destroyed, which of course, means the Banks monopolies will increase.

    Competition is the driving force for a stable and progressive economy, that enables checks and balances, in conjunction with clear, fair and concise laws and regulations,
    allows smaller competitors to provide more efficient and better customer services
    than the bigger players and also enables all Australians to have more choice.

    What Hayne recommends is the opposite.

    Then to cap it off, we have Shorten saying he will go ahead with ALL the recommendations before they were released.

    As usual, politics has intervened so we will once again get very little except chaos and vested interest groups like the Banks and unions, pushing their own barrows to the detriment of us all, unless a more aggressive approach is taken this time around to curtail the likes of the FSC and every fringe dweller and left wing nut job jumping on the bandwagon and muddying the waters.

    The AFA and the revamped LICG seem to be the only representative group who have an understanding of the real issues.

    I hope they take a harder approach and call out Hayne and his absurd recommendations by attacking his assumptions around the Life Insurance Industry, instead of the previous failed attempts of trying to put their opinion across, which does nothing unless you destroy the credibility of your opponent by pointing out their deficiencies in their arguments.

  • lester beling

    You see the matter of conflicted remuneration is not understood by most, this is why we have this knee jerk reaction to commission.
    What is the real problem?
    The payment of VOLUME Bonus & OTHER Commissions to AFSL based of approved product list and volume to vertically integrated is the biggest CONFLICT.
    Sadly the ailment goes back 30+ years when banks purchased the insurance & investment arms of INSURERS.
    I know i was there during the agency development SCANDAL – AMP v AXA was the starting point and birthed the FPA and created another monster.
    You all know about Humpty Dumpty, and this is what i think of the current findings, all the kings horses will not put humpty dumpty back again.

  • GuyM

    I wonder whether the commissions the industry funds receive on their Member’s insurance premiums will also be ‘zeroed’?

  • Phil Smith

    Herald Sun has today confirmed their ignorance & misunderstanding surrounding risk insurance commissions. I quote from page 8 – ‘Current caps on life insurance commissions are 80% of the policy cost for upfront kickbacks [their word] and 20% ongoing’.

    No, the cap is currently 70% to be reduced to 60%. Commission paid excludes policy fees, stamp duty & frequency loadings. Not one adviser gets paid 70% of the ‘policy cost’ let alone 80%! On an income protection paid monthly [premium] of $125 we get paid 53% ‘upfront’ and 15% ongoing of the total premium payable as opposed to the actual commissionable portion of the total premium.

    Reporting 80% when we really get paid between 53% and 63% upfront – the Herald Sun should be brought to account for mis-reporting the true facts.

    Definition of ‘kickback’ – bribe, graft, backhander, sweetener’! Commission for providing a professional service is NOT a ‘kickback’.

  • Scott Kilvington

    Now that all insurers are paying the same levels of hybrid commission, where’s the conflict? If our average cost to prepare an SoA and implement insurance recommendations for a client is say $3,000, do these politicians and regulators realize that most clients wouldn’t be prepared to pay that much in advice and implementation fees? Have they ever asked clients whether they would rather pay a fee in addition to a premium? I don’t think so!

    • Phil Smith

      A very recent survey result reported only 3% of borrowers would pay a fee to a mortgage broker in lieu of commission. No Scott, they don’t ask nor do they care what the client thinks or wants.

  • Old Risky

    Roger Smith is spot on in his comments. Any risk business which is valued on a multiple of renewal commission is actually worthless until 2021.

    That’s because Hayne has swallowed the ideology perpetrated by ASIC in their final submission to the RC. We have known for many years that ASIC would prefer not to have upfront and renewal commissions for life risk products, because of the dubious claim of “conflicted advice”. We will await ASICs intervention in the real estate industry, the car industry and any other Australian industry in which incentives are provided to intermediaries to as a means of distribution of a product.

    Right now we have maybe 10,000 risk advisers who, because of the impact of LIF and FASEA on their capacity to continue to practice as RISK ADVISERS , are planning to exit in the next 1 to 2 years, if not already engaging with buyers.

    AS OF LAST MONDAY THAT PLANNED EXIT IS ON THE BACK BURNER. The seller of such a RISK business, who would have factored in the value of his business as part of his retirement planning, will be unable to get anything other than a ridiculous multiple as low as 0.5 times, until the matter is “clarified “ in 2021. All he has to sell NOW is client details and policy numbers – NO ONGOING REVENUE!

    Apart from the matter of impacting on the capacity of the adviser obtaining a reasonable multiple, effectively Mr Hayne, in endorsing ASIC’s long held ideological viewpoint, has sent a message to the limited number of banks (NAB) who used to fund advisors purchases of departing adviser businesses. What bank would be prepared NOW to lend $1-$2 million to a purchasing adviser to buy an asset that in two years, in all probability,
    WILL BE WORTHLESS, other than as a basis for product replacement .

    That in itself will be much harder because ASIC will be looking out for that type of activity.

    I note that there has been some Industry comment that ASIC were always going to review commissions and the impact of LIF in 2021, “ so nothing’s changed”. Sorry but that’s rubbish! Commissioner Hayne has just given ASIC a rock solid, gold plated, guarantee that ASIC can take to government in 2021, and override objections from the industry, and achieve their long held objective. It’s like being told by FIFA that you can have the soccer World Cup in your country eight years out – you can bank on that guarantee.
    WE NEED CONCERTED ACTION TODAY. What we need TODAY is for the very panicked Mr Frydenberg to make an unequivocal statement TODAY that that this particular recommendation from Commissioner Hayne WILL NOT BE PUT IN PLACE. GOOD LUCK !!!

    IT IS ALSO IMPERITIVE THAT WE GET SOME INTELLIGENT LEADERSHIP FROM THE LIFE COMPANIES. What we really need is some focus, for just once, on something other than a short term gain. That Leadership should involve COLLECTIVE REPRESENTATION to Government, assuming of course the life offices actually understand the threat to their system. There should be someone left in a life risk office somewhere who understands that where a risk advisor walks out of his business, and doesn’t personally introduce clients to the purchaser, ordinarily at least 25% of the “high touch” small business clients in that practice will lapse policies – in the first year. We live in hope, and the FSC will be useless, as always!

    That possibility of losing at least 25% of recently introduced “high touch” business clients has to be a direct threat to the viability ( capital adequacy and solvency) of some life insurance companies, and in some cases their continual frolic of engagement in DEFAULT GROUP LIFE SCHEMES. Even the Labor Party must “get” that concept, and understand the real threat to cheap default death & TPD cover to industry funds when insurers are struggling with viability.

    • Squeaky_1

      Hi Old Risky, Hope all’s well mate – or as well as can be with all this idiocy going on! Please have a read of the comment I just left down the page in response to Roger’s comment. It may help.

  • Squeaky_1

    Roger, Risk businesses and the renewal commissions are still subject to LIF. Hayne didn’t put too much acid in that direction. I will be selling my client base in about a year (I’d do it right now but for a few personal reasons) and I am confident it will command at least 3.5x renewals, if not more. My reasoning for this is that even Hayne won’t be able to argue that clients don’t need advisers when the rubber hits the road. A risk renewals income stream is now and will continue to be the most lucrative, appropriate and reliable income source in the industry and this fact won’t be lost on potential buyers. Like you, I’ve been around forever and I normally agree with and respect your comments. However, in this case, I think you are worrying unnecessarily. This isn’t blind ‘hope’ on my part. I’ve consulted widely with life execs, politicians and others on this point. Please, be reassured, risk renewals will not be going away – at least existing ones for sure and probably not renewals associated with new business either. There is simply no other way to ensure client best interest if they go – fees simply will not be tolerated by clients at claim time and advisers MUST be there for clients at claim time. Ongoing renewal income is the ONLY way to ensure client best interest at claim time. This isn’t false hope Roger – think it through logically. Risk client bases will be like gold (even more than now) around 2020.

    • Roger Smith

      Yes, I share your view (Squeaky_1) that the “most likely” scenario in respect to existing risk income streams is as it is today and that the value will be enhanced in the future particularly if your client base is all high net worth individuals (where no financial planning has been undertaken) . For a potential buyer if they share my view they can give me a call and we can discuss – I’m easy to locate.

  • Squeaky_1

    Hayne CLEARLY does NOT have any grasp of the mechanics of our industry or the intricacies of face to face dealings with or relationships around clients. It is a travesty that someone of his LIMITED acumen in this area has been given the responsibility for the future of an entire industry. Hopefully govt takes his recommendations with the grain of salt it deserves. Surely ‘some’ enlightenment or common sense HAS to come from SOMEWHERE. I still can’t get over Bowen and Shorten saying they would implement his recommendations BEFORE they had any idea what those recommendations would be. That is in your face idiocy and pandering to the PC crowd if ever there was pandering and idiocy. They should be abjectly ashamed and grossly embarrassed spouting premature pronouncements like that. At best it is irresponsible and at worst criminal and a betrayal of every Australian. It makes an absolute MOCKERY of the concept of ‘client best interest’. Why is nobody calling them out on this in public and shaming them as they deserve – Hayne, Bowen, Shorten et al?