Assistant Treasurer Josh Frydenberg has released life insurance remuneration reform proposals that may see a cap of 60 per cent on hybrid commission structures, among some other key reforms. Naturally remuneration isn’t the only issue on the table, but it is one of the most hotly debated.
The recently-released recommendations by John Trowbridge triggered some significant changes in the way many companies do business, including Frydenberg’s.
The new plan proposes:
- A maximum payment of 60 per cent of total upfront commissions to be paid on the premium in the first year of the policy, from 2018.
- Ongoing commissions are capped at 20 per cent of the premium in all subsequent years from 1 January 2016.
- Clawback period starts from 1 January 2016 and has specific applications, with the first policy year 100 per cent of the commission on the first year’s premium, in the second year 60 per cent of the commission is paid on the first year’s premium, and in the third year 30 per cent of the commission is paid on the first year’s premium.
- There is to be a ban placed on volume-based payments from 1 July 2016, with grandfathering arrangements put into place.
- Life insurance companies are to offer fee-for-service insurance products for those advisers wishing to use those service models.
The transition will be undertaken over three years, ending with the 60 per cent commissions on the first year from 2018. Transitional arrangements are in place, with maximums for years’ one, two and three sitting at 80, 70 and 60 per cent of the premium respectively.
In respect to the quality of advice and insurance company behaviour and practices, there is talk of expanding Approved Product Lists to include more insurers by the middle of 2016, and the development of a Code of Conduct by the Financial Services Council (FSC). The banking and general insurance industries already have such a code, which delineates best practice in underwriting and claims management, and sets a base standard of practice.
Monitoring of life company policies will be undertaken by ASIC in an ongoing system of data collection as of 1 January 2016, with a review at the end of 2018. ASIC will also be reviewing Statements of Advice (SoAs) to ensure disclosure is simple and effective for consumers and advisers alike, with the possible rationalisation of life insurance legacy products.
So what does industry think?
The Association of Financial Advisers (AFA) has responded to the proposal saying the association is ‘generally supportive’, and that most advisers will find a way to make it work.
The AFA’s chief executive Brad Fox has lamented the fact that so much of the debate has been around remuneration, when he believes quality of advice and compliance are the real issues. This is particularly true after the ASIC life insurance report released in 2014 showed unacceptable levels of poor advice widespread in Australian advisory firms.
The AFA statement reads, 'The AFA has pledged to provide the support advisers will need to transition to new models for providing life insurance advice.
'We know that the average cost to a financial advice practice to deliver and implement quality life insurance advice is around the $3,000 mark, yet advisers will receive less than this in commission for advice provided to the average client ... Business models will change.
'Efficiencies will have to be found. We will support advisers to adapt and change to operate successfully into the future. We will hold insurers and other industry stakeholders accountable to deliver the efficiency gains that are needed. The Australian public needs the support of advisers so we mustn’t allow this to create an exodus of advisers from the market.'
Both the AFA and the Financial Planning Association (FPA) worked on the submissions in a joint effort to get the best outcomes for the industry. Fox sums it up by saying that high upfront commissions and insurer behaviour have made churning easy and created conflicts of interest that need to end, and hopefully will with the new measures.
Generally, other reports from the finance and life insurance industry in Australia have been overall positive, and although the consensus is that change is definitely required, the nuts and bolts are still being rearranged regarding what that looks like going forward.
A controversy erupts
A controversial outcome to the reform proposals came in a personal attack by Brisbane adviser James Howarth directed at Frydenberg via social media. A series of Tweets included derogatory religious comments and name-calling, with vitriol being thrown Frydenberg's way with great Twitter might.
Howarth’s actions have resulted in the termination of the Australian Financial Services licence authorised representative status of the advisory firm he is principal of, Retirement Wealth Advisers, handed down from Libertas Financial Planning, the umbrella dealer group. Libertas took immediate action to remove Howarth after the comments were made.