Accompanying its first public call for a return to 80\/20 hybrid commission is a tandem call by the AFA to scale back elements of the LIF commission clawback provision, which has been an equally contentious issue for many financial advisers.<\/p>\n
Data supporting the call to return to 80\/20<\/strong><\/p>\n Of critical importance in considering the return of hybrid commissions to 80\/20 is the requirement of the Treasury for submissions to provide fact-based data to underpin responses. QoA Review Question 53 asks:<\/p>\n Has the capping of life insurance commissions led to a reduction in the level of insurance coverage or contributed to underinsurance? If so, please provide data to support this claim.<\/em><\/p>\n Rather than simply offering anecdotal evidence, the AFA’s submission includes what it refers to as ‘compelling data’ which supports the fact that capping risk commissions has indeed led to a reduction in the level of insurance coverage and contributed to underinsurance. This compelling data considers two critical factors:<\/p>\n 1. The decline in Individually-advised life insurance policy holder numbers<\/span><\/p>\n The association utilises data released by APRA to supporting its contention that the capping of life insurance commissions has had a significant impact on the number of individually-advised clients. The following table sets out this decline in advised client numbers, and is taken by the association from APRA Claims and Disputes statistics:<\/p>\n 2. The cost to provide life insurance advice requires much higher premiums for this to be economically viable<\/span><\/p>\n In the diagram below, the association says it has assumed that the average cost to provide life insurance advice is $3,000, illustrating that – at a 60% upfront commission level – the amount of overall life insurance premiums needs to be $5,000 for the adviser to cover their costs: “This means that in recent years they have ceased providing advice to clients who are likely to have lower premiums, as it is simply not economically viable,” says the submission.<\/p>\n …this problem can only be fixed by a combination of increasing the commission rate and reducing the cost to provide life insurance advice<\/p><\/blockquote>\n The submission advocates that this problem can only be fixed by a combination of increasing the commission rate and reducing the cost to provide life insurance advice: “In the absence of this, life insurance advice will only be available to a small proportion of the population,” notes the submission, which adds the diagram demonstrates that an increase in the commission rate and a reduction in the cost of providing life insurance advice will make advice available to many more Australians, as shown by the yellow shaded area:<\/p>\n In stating that there has been a very material reduction in the number of Australians covered by retail advised life insurance policies since the LIF reforms commenced in 2018, the association warns it expects that this trend will both continue and rapidly accelerate if upfront commissions were reduced further below the current 60% cap:<\/p>\n …LIF is contributing to an increase in the level of underinsurance, and this is only going to get worse<\/p><\/blockquote>\n “Thus we firmly believe that LIF is contributing to an increase in the level of underinsurance, and this is only going to get worse, even if the current caps are kept in place,” warns the association, which also rationalises its position around the fact that its recommended hybrid model is one that existed and operated successfully in the ‘pre-LIF’ era, and which also generated a good compliance outcome in ASIC’s contentious Report 413 in 2014.<\/p>\n The AFA’s QoA Review submission is extensive and includes detailed reflections and recommendations on a host of other critically-important issues confronting advisers, consumers and the broader sector. Riskinfo will report other crucial elements contained in the associations’ submission, which addresses 83 questions put by the QoA Review, but where the AFA’s ten main recommendations are detailed below:<\/p>\n![\"\"](\"https:\/\/riskinfo.com.au\/news\/files\/2022\/06\/220616-AFA-QoA-Submission-1.jpg\")
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<\/a>Click here<\/a> to access the AFA’s Quality of Advice Review Issues Paper submission, where advisers interested in the AFA’s position on risk commissions can refer to section 7 in its introductory letter commencing on page 8, as well as page 21, and responses to questions 48 – 53.<\/p>\n