The Financial System Inquiry has recommended the effective banning of upfront life insurance commissions.<\/p>\n
In its final report, released today, the David Murray-led Financial System Inquiry has made 44 recommendations to the Government based on its investigation into Australia’s financial services sector.<\/p>\n
Recommendation 24 in the final report relates to aligning the interests of financial firms and consumers. Within this recommendation is the call by the Inquiry to effectively ban upfront risk commissions in its recommendation to require that ‘… upfront commission for life insurance advice is not greater than ongoing commissions.’ The report’s rationale for this recommendation is based on the Inquiry’s concern with findings handed down in the recent ASIC Review of Retail Life Insurance Advice<\/a>. The FSI report states:<\/p>\n “A recent ASIC report on life insurance revealed significant problems with both compliance and the consequences for consumers. More than a third of the personal advice reviewed failed to comply with the laws relating to appropriate advice and prioritising the needs of the consumer.”<\/em><\/p>\n … industry approaches to address the issues in life insurance have not worked<\/p><\/blockquote>\n The report continues:<\/p>\n “Upfront commissions can affect the quality of advice. ASIC found that 96 per cent of advice rated as a \u2018fail\u2019 was given by advisers paid under an upfront commission model. ASIC also found high upfront commissions encourage advisers to replace a consumer\u2019s policy rather than retain it. In some cases, this may result in inferior policy terms. To date, industry approaches to address the issues in life insurance have not worked.”<\/em><\/p>\n The FSI says that by ensuring upfront commission for life insurance advice is not greater than ongoing commissions would mean reducing incentives for churning and improve the quality of advice on life insurance. The report goes on to explain how the FSI envisages a level commission remuneration environment would operate:<\/p>\n The remuneration model needs to be sustainable; otherwise there is a risk that providers may exit the market…<\/p><\/blockquote>\n “For life insurance, the Inquiry recommends a level commission structure implemented through legislation requiring that an upfront commission is not greater than the ongoing commission. This would provide a balanced and cost effective approach to better align the interests of advisers and consumers. The remuneration model needs to be sustainable; otherwise there is a risk that providers may exit the market, making it more difficult for consumers to obtain life insurance advice.”<\/em><\/p>\n The report acknowledges that the findings of the yet-to-be-released Financial Services Council and the Association of Financial Advisers working group<\/a> should also be considered during the development and implementation phases of the recommendations.<\/p>\n Riskinfo will provide additional reporting on the final report from the Financial System Inquiry, including reaction to all the key Recommendations, including Recommendation 24.<\/p>\n