The Association of Independently Owned Financial Professionals (AIOFP) and the Association of Financial Advisers (AFA) have both submitted proposals asking the federal government to amend the clawback timeframe that has been laid out for advisers providing risk products to clients.
The Association of Independently Owned Financial Professionals (AIOFP) proposals suggest that the reforms outlined by the Federal Government are impractical and not commercially viable for small financial advisory firms, with concerns raised about the three-year retention period.
The commission structure that currently exists could be replaced with upfront commissions of 60 per cent (currently commissions are up to 120 per cent), with a three-year clawback period. The AIOFP suggests that first-year commission rates should be set at 70 per cent, which would sufficiently remunerate an adviser for their time and efforts. The proposal states that advisers should be able to keep 20 per cent of the first year’s premium in case the client prematurely terminates the policy, with the implementation of a time-on-risk formula for the rest of the first year, with a two-year clawback period.
The AIOFP proposal seeks to restrict advisers who are repeat churn offenders by capping their level commissions until they are able to prove they are of sound practices, while reporting them to ASIC, to get rid of the small number of advisers who continue to churn policies without consequence.
The AIOFP has also requested that industry associations publicly release the proposals that were delivered to Assistant Treasurer Josh Frydenberg as part of the life insurance reforms. The AIOFP has been heard loud and clear publicly, but the associations’ proposals have been kept quiet. Peter Johnston, the executive director of the AIOFP, has questioned the content of the proposals, saying it is possible the associations favoured insurance institutions over the industry as a whole in the documents, including advisers.
The AFA has stated that clawback provisions for risk insurance policies should be applied to replacement product advice, and not to any situation that is outside the control of the adviser. The AFA is pushing for better outcomes for advisers after the Trowbridge reports were released, with the three-year clawback period on the radar. The three-year clawback period was generally deemed to be acceptable, however when policies lapsed through no fault of the adviser, it was thought to be unfair.
The AFA wants clawback to apply to replacement product advice only, and is seeking assurances by life companies that they will not apply clawback when the policy has lapsed due to a successful claim.
Industry has spoken on the clawback arrangements - they are not fair. For example if another adviser writes a new policy for a client, or if the client can no longer afford the insurance due to unfortunate circumstances, clawback up to three years will be applied, which leaves advisers hanging without certainty of their income for a full three years per client, per policy.