Hayne gets it wrong on life commissions, says AFA

In an analysis written to members, the AFA’s general manager for policy and professionalism Phil Anderson said Commissioner Kenneth Hayne expressed a “clear bias for further reductions in commissions” despite saying at the same time to let the 2021 ASIC review play out as per the government’s commitment.

Mr Anderson took issue with the report referencing that life risk insurance commissions received attention during the hearings.

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“This is somewhat surprising, as there was only one prominent case that referred to life insurance advice, which was the couple who received advice to set up an SMSF and buy a bed and breakfast,” he said.

“The life insurance advice was incidental to the SMSF advice, although the overall case was clearly disturbing enough to be included as an example in the FASEA code of ethics.”

Further, Mr Anderson noted that the final report goes on to incorrectly describe the Life Insurance Framework (LIF) model, in particular the paragraph:

“From 1 January 2018, conflicted remuneration includes volume-based benefits given to a licensee or representative in relation to information given on, or dealing in, a life risk insurance product. A monetary benefit relating to a life risk product will not be conflicted remuneration if it is a level commission within the applicable cap and provides a ‘clawback’ arrangement if the policy is cancelled, not continued, or the policy cost is reduced in the first two years of the policy.”

“The clear error is in the suggestion that the cap and clawback arrangement applies to level commission business. It does not,” Mr Anderson said.

“The LIF model applies to upfront commission arrangements only. We were certainly surprised to see this error, particularly given that the AFA had pointed out the exact same error in our response to the interim report.

“Unfortunately, this was just one of a number of errors in the interim report that were repeated in the final report.”

Mr Anderson then pointed out that commissioner Hayne goes on to say that if the 2021 review indicates that if the LIF caps do not contribute to underinsurance then ASIC should continue reducing the caps ultimately to zero. He said this highlights further errors and misunderstandings.

“Firstly, ASIC only has powers to reduce the commissions on upfront business. They do not have any power to alter the level commission arrangements,” he said.

“Secondly, a quick check with a few life insurers would no doubt clarify the impact that LIF had in 2018, with a material reduction in new business. Probably the most alarming thing is the implication that if going to 60 per cent will not have much impact, then going to zero will have a similar impact.

“Many financial advisers will find it challenging with a 60 per cent upfront commission rate. If it went to zero, they will simply leave, and leave in droves. We can only imaging what a devastating impact that this would have on the state of underinsurance.”

Lastly, Mr Anderson highlighted commissioner Hayne’s conclusion that any decision made in the ASIC 2021 review should be based upon clear evidence that the harm that would flow from abolishing commissions would outweigh the harm that already flows from allowing this form of conflicted remuneration to continue.

“We can only wonder what he bases this judgement on. We could easily respond by saying that ASIC Report 413 revealed a 93 per cent pass result for hybrid commissions, which was a higher commission rate than we have now,” Mr Anderson said.

“It seems that this ideological determination to eliminate all conflicted remuneration is contributing to statements without justification or evidential support.

“There is a much stronger basis to say that there is little harm done to clients as a result of life insurance commissions and that the royal commission provided nothing to prove otherwise.”