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Upfront commissions under pressure

The Financial System Inquiry final report has recommended extending the definition of “conflicted remuneration” and making changes to the life insurance remuneration models open to advisers.

In an effort to “better align the interests of financial firms with those of consumers”, the FSI final report has waded into the controversial debate around life insurance commissions, recommending changes to the remuneration status quo.

The report recommends the government legislate to prevent financial advisers from receiving upfront commissions on life insurance products that are greater than ongoing commissions, thereby seeking to reduce “incentives for churning” and improve quality of advice.

“In light of recent evidence, the inquiry is concerned about high upfront commissions for life insurance advisers,” the report states.

“This has been a longstanding industry practice reflecting that life insurance has higher arranging costs, such as managing the underwriting process, and that consumers are often not independently motivated to purchase life insurance.”

Referencing ASIC’s damning review of the risk advice sector, the report says that “to date” industry approaches to self-regulate the industry have “not worked”, leading the FSI committee to conclude changes are necessary.

“The inquiry recommends a level commission structure implemented through legislation,” the report concludes.

“This would provide a balanced and cost-effective approach to better align the interests of advisers and consumers.

“The remuneration model needs to be sustainable; otherwise there is a risk that providers may exit the market, making it more difficult for consumers to obtain life insurance advice.”

However, it adds that “at this stage, the inquiry does not recommend removing all commissions” and that the percentage amount of the level commission is a matter for the industry to decide.

It also urges the government to heed the findings of the AFA-FSC working group on life insurance.