Riskinfo considers the methodology that ASIC will be using to determine the quality of life insurance advice in 2021. We ask how this outcome will be compared with the past, which may be critical in determining the future of life insurance advice in Australia…
At last week’s AFA Vision 2020 Virtual Conference, ASIC’s Senior Executive Leader, Financial Advisers, Kate Metz, outlined the methodology the regulator will be employing when conducting its review of the impact of the Life Insurance Framework remuneration reforms.
During a Regulator’s panel discussion, Metz told the virtual conference audience that ASIC is undertaking two pieces of work in relation to the 2021 ASIC Review of the quality of life insurance advice. Noting these two pieces of work are connected, she said they will comprise:
- A review of the quality of life insurance advice in 2017 in the lead-up to the start of the three-year LIF transition period on 1 January 2018.
- A further review of the quality of advice based on advice delivered in 2021, post the full implementation of the LIF remuneration reforms.
Metz said the purpose of the two reviews is to determine whether there has been improvement over the two periods of time, ie between 2017 and 2021.
We are not targeting poor advice. It is completely random…
She added that the methodology ASIC would employ is the same for both sets of reviews, namely that the regulator will be reviewing a random and representative sample of advice: “We are not targeting poor advice. It is completely random,” she said.
Metz added that ASIC has started work on the review of 2017 advice and notices have now been served on about 130 licensees, calling for 2017 advice files. In most cases, Metz says ASIC has requested only one or two files from licensees, but in some cases, more files from larger licensees.
Compare and contrast
This methodology for collection of the data which will inform the 2017 and 2021 advice reviews appears logical and fair. It reflects the stronger engagement that now appears to exist between the regulator and key industry stakeholders. But it’s difficult not to contrast this more open approach with that taken by ASIC when collecting data which shaped the findings contained in its Report 413 Review of retail life insurance advice.
In stark contrast to that intended for the 2017 and 2021 advice quality reviews, ASIC took an almost opposite approach in framing Report 413, which was released in October 2014, based on advice files dating back to 2012 and 2013. In the methodology notes accompanying Report 413, ASIC’s approach was revealed as far from random. The regulator said it employed:
“…a targeted surveillance in so far as the sample of files selected for review was not a random sample of advice from randomly selected AFS licensees or authorised representatives. Rather, our objective was to identify the licensees and authorised representatives who were active in giving life insurance advice so as to test the quality of advice these licensees were giving.”
There’s also a second key difference in methodology this time around, which relates to the number of licensees selected for review of their advice files.
In 2014, ASIC notes it asked the retail life companies to provide details of the three licensees or authorised representatives who had:
- the highest number of new ‘in force’ policies written in the relevant period (2012 and 2013 financial years); and
- the highest number of policy lapses in the relevant period.
The regulator went on to detail that, of the pool of AFS licensees identified in the high selling category by insurers (after it excluded licensees that had been the subject of recent regulatory action by ASIC), it chose two large licensees and three medium licensees from the remaining pool.
ASIC notes it also added two small licensees to the sample so that its final sample group included advice from a broad mix of licensees. This ‘broad mix’ of licensees totalled seven (two large, three medium and two small). However, a note in the report states that the results from the two small licensees “…had a negligible impact on the overall results of this report.”
Given this negligible impact from the two small licensees, ASIC is therefore declaring its Report 413, which was highly critical of the quality of life insurance advice, was based on advice files it obtained from two specifically-targeted large and three medium-size licensee firms.
Contrast this 2014 methodology which was pointedly NOT random, and which targeted a ‘broad mix’ of only five licensees with that outlined by Metz for the regulator’s 2017/2021 reviews, which are completely random in nature, and which will include at least 130 licensee firms.
Riskinfo can’t help but reflect on what the findings delivered in Report 413 may have been, had ASIC employed the same methodology it will be using to collect data for its 2017/2021 reports.
Context – what is being compared?
What matters today, however – and in 2022 when the new report will be published – is ASIC’s verdict on the relative quality of 2021 life insurance advice.
According to Metz, the entire purpose of ASIC’s two-part ‘connected’ review is to see “…whether there has been improvement [in the quality of advice] over the two periods of time.”
In comparing apples with apples, there’s a logic attaching to the argument that it’s reasonable to compare 2017 advice quality with that being delivered in 2021, ie pre and post LIF commission restrictions, especially because the same research methodology is being employed for both sets of research.
But what happened to the relative quality of life insurance advice between the 2012/2013 period, which informed ASIC Report 413, and the quality of life insurance advice delivered in 2017, by which time most licensees and advisers will have taken on the learnings associated with the issues revealed in Report 413? Even though commission restrictions did not commence until 1 January 2018, there’s an argument that behaviours had already started to change which led to improved overall quality of life insurance advice.
Should ASIC be taking this possibility into consideration? What might be the relative difference in quality between the 2017 advice files and the 2012/13 file sets? Should this matter? It might matter a lot, if there’s a significant quality improvement during that time, but little change between 2017 and 2021.
If ASIC finds a big jump in relative advice quality when its report is released in 2022, the Government may take the position that its Life Insurance Framework remuneration reforms have been effective and will retain the status quo. If the regulator reports little change, however, the Government may determine it will be justified in moving to the level commission model recommended in David Murray’s Financial System Inquiry Final Report, as flagged in February 2017 by former Financial Services Minister, Kelly O’Dwyer.
The Government has been at pains since 2015 to emphasise the entire purpose of the Life Insurance Framework reforms is to better align the interests of financial firms and consumers. It wants to remove conflicts of interest and ensure that all consumers can access non-conflicted, quality life insurance advice. Everyone supports that outcome. Everyone.
As things currently stand, it appears that the current 60/20 remuneration model for life insurance advice mandated by the Government will not generate sufficient income to sustain a risk only or risk specialist advice business in today’s heavily regulated advice sector. The steadily declining number of risk specialist advisers (well-documented elsewhere) supports this contention.
From the life insurance adviser perspective, most of whom operate as dedicated small businesses, it would be gratifying to think that the Government will fairly consider and weigh the findings of the 2017/2021 ASIC reviews. It is hoped that the Government will make decisions based on the findings that will serve the best interests of consumers without decimating an industry, because without life insurance advice being widely available to the vast majority of consumers who need that advice, then the consumer – the intended beneficiary of the Government’s resolve – will be the biggest loser.