Insurers would support lift in commissions if government shows interest, experts say

The present commission structure consists of 60 per cent for upfront commissions and 20 per cent for trailing commissions, featuring a two-year clawback provision. And while advisers, particularly the Association of Independently Owned Financial Professionals (AIOFP), have lobbied the government for an increase in commissions, the government’s first tranche of legislation in response to the Quality of Advice Review (QAR) released last week confirmed commissions are remaining unchanged.

Labelling it the “worst piece of legislation in history”, Mr Johnston, executive director of the AIOFP, told ifa on the sidelines of the body’s Canberra conference that life insurers too want the LIF to change, starting with a lift in commissions to 80 per cent upfront.

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“They’re [insurers] not getting inflows and the public are not getting protected. I think there is consensus, all the product managers I’ve spoken to think the commission should be at 80 per cent upfront. It still takes the conflict out of it. So maximum 80 per cent,” Mr Johnston said.

He opined that the LIF, orchestrated by former treasurer Josh Frydenberg, was designed with the intention of reducing the number of financial advisers – a goal he claimed has been achieved.

The beginning of the LIF, as outlined by Mr Johnston, dates back to 2013–14 when insurance companies sought to bypass advisers and directly sell policies to the public.

“The purpose of LIF was to cull advisers,” Mr Johnston said.

“The insurance companies at that stage, in 2013-14, wanted to go directly to the public and sell them policies, they didn’t want pesky advisers. It was all done through the Trowbridge report, and I think that was a setup because they said that churning was a major problem – advisers moving policies from one place to another – and that was used as the excuse to attack advisers. And they’ve done a very good job”.

Namely, the LIF’s primary objective was to eliminate policy churning through clawback rules, requiring advisers to return commissions if customers switch to a new product within the first two years.

However, according to Mr Johnston, the problem was exaggerated and the real consequence has been the reduction of new inflows into insurance pools, as well as the imposition of a financial burden on advisers.

“What it’s done is create a situation where advisers can’t make any money and consumers can’t afford it. They have to pay $3,000 for a Statement of Advice and then they get some advice on life insurance, how are they going to pay for that?”

Mr Johnston argued that due to the lack of new inflows and the offshore ownership of most Australian life insurance companies, premiums for existing policyholders have doubled. Consequently, consumers are forced to cut their coverage in half, leading to a surge in underinsurance – a problem he said is now “through the roof.”

CALI won’t lobby government on commissions

Earlier this month, the government presented draft law for recommendations 13.7 to 13.9, which relate to obtaining consent for life insurance, general insurance, and consumer credit insurance commissions.

The draft legislation proposes to retain all current caps on commissions and seeks to enshrine in law the requirement for advisers to seek one-off consent from their clients, in writing, to receive a commission.

Speaking on the matter last week, Financial Services Minister Stephen Jones said an increase in life insurance caps is “not something that is on our agenda”.

“It’s not even in the in-tray,” he added. “Look at what is in the in-tray, and there’s a lot.”

Touching on this at the AIOFP conference, Christine Cupitt, CEO of the Council of Australian Life Insurers (CALI), said the group has no intention to lobby the government on commissions due to the minister’s obvious lack of interest.

“We need to be practical about what we can achieve. The minister has said that a review of these issues is not on the table and in fact, not even in the in-tray, so we’re focusing on outcomes we can influence,” Ms Cupitt said.

“If there was to be a process run by the government to review that, we would actively participate in that process.”

Ms Cupitt declined to solely attribute the underinsurance issue to the LIF, characterising it as a “multifactorial” challenge.

Consent unnecessary

Mr Johnston is also a big opponent of the consent rules proposed in the first tranche of draft legislation.

“They [the government] need to take off the compliance stuff because all those consent forms, they were put into place after the royal commission because of what the banks were doing – the fee for no service. All the banks have left, and the advisers are left with all this stuff,” Mr Johnston said.

The legislation suggests that consent would be granted on a one-time basis and remain in effect throughout the policy’s duration.

According to the explanatory memorandum, in order for the client to make an informed decision, the advice provider must disclose both the commission the person will receive (upfront commission and trail commission) as a per cent of the premium and the nature of any services the adviser will provide to the client (if any) in relation to the life risk insurance product (such as claims assistance).

“While a financial adviser has a duty to act in the best interests of the client about the advice provided, the prospect of receiving a commission creates a conflict for the adviser,” the memorandum reads.

“Recommendation 13.7 recommended the law should address this conflict by requiring that an adviser should obtain a client’s consent before they accept the commission. The intention is that the consent requirement will support clients to understand how an adviser’s personal interest might influence the advice they are receiving on life insurance products.”

It added that if the client does not consent, then the adviser can either agree to provide the advice for a fee paid by the client or they can decline to provide the advice.