This morning, Assistant Treasurer Josh Frydenberg announced that the government was backing a move toward flat and level commissions or fee for service agreed to by the FSC, AFA and FPA over gruelling negotiations in recent weeks.
The agreed policy will consist of a maximum total upfront commission of 60 per cent of the premium in the first year, including a maximum ongoing or trail commission of 20 per cent of the premium in all subsequent years.
“Starting from 1 January 2016, upfront commissions will be capped at 80 per cent and then reduced to 70 per cent from 1 July 2017, before settling at 60 per cent from 1 July 2018,” a statement from Mr Frydenberg said.
However, despite the consensus, AFA chief executive Brad Fox acknowledged that not all advisers will be pleased with the deal, adding that the last eight months have been very difficult for his association.
“The final position represents a compromise that, whilst challenging, is at least workable for most advisers and offers a package of measures and a transition that will see advisers, licensees and insurers sharing the responsibility for improving the outcomes from retail life insurance advice,” said a statement from the AFA.
Mr Fox revealed that the AFA was pushing for a more generous hybrid 80/20 solution but ultimately conceded “this is not something the community will now accept for the long term”.
However, he said that the three-year transition period will be “critical to advisers being able to adjust to the significance of the change.”
The FSC and FPA have both issued statements welcoming the agreement and the conclusion of successful negotiations between the three bodies, as did insurer Suncorp
Suncorp Life boss Geoff Summerhayes said the proposed policy was a “well considered response to a number of delicate issues” while acknowledging that some advisers will be put out and may have “difficulty in adjusting”.
Industry Super Australia (ISA) said that the recommnedations made by the indutrsy-established review don’t adequately tackle the problems of life insurance commissions.
“While we support the proposal to ban volume rebates (wholesale commissions) and put in place clawback provisions, the proposals do not go far enough given the significant detriment to consumers identified by last year’s ASIC report on life insurance, including that 37% of advice provided was inappropriate for the client.” Matthew Linden, ISA’s director of public affairs said.
“The proposal leaves in place commissions as the dominant remuneration model in life insurance advice. While a 60% commissions are lower than current levels, they are still going to lead to biased advice and poor consumer outcomes.”
I guess the 20% flat rate of trail commission on the premium is a bit of a win. Im surprised they didn’t make it 20% of the (first yrs) commission which is much lower. I got to tell you the 3 yr resposibility period makes me feel sick. Its hard for the smaller advisers to stop the big accountancy practices/banks from cherry picking their clients. Maybe written into the SOA is a proviso that if the client stops the cover inside 3 yrs due to any reason at all (except death)that they will be billed for that % we have reversed. I dont think we could enforce it, but food for thought?
Has anyone ever seen a requirement on an SOA to disclose the retention period? Maybe this is what will now become a major focus for future SOA’s. It might go something like this.
Mr/Mrs client, the remuneration that I ACTUALLY earn may be nothing like that stated in dollar terms and percentage term in your SOA. In fact I could well earn absolutely nothing and after the “one sided” recent negotiations in our Industry if I (survive) a period of three years I will in fact receive the amount stated in the SOA. If you for whatever reason change your mind or if the Life Office rejects your application I will earn NOTHING. If you become influenced by someone else in the Industry to change over servicing to them they will in fact get my remuneration BUT I will be holding the responsibility for the 3 years anyway. Have I made the issue of remuneration clear enough or would you like to speak to John Trowbridge. John’s remuneration is based on 100% of what he earns he gets to keep – like most other Australians who work hard EXCEPT RISK ADVISERS. You asked about what I have to pay tax on. Well it’s interesting that I have to pay tax on 100% of the income I receive even though there is quite a strong possibility I won’t actually get to keep it and I cannot make provision in my business accounts for that contingency. Sorry what was your question? Yes, asking why anyone would be stupid enough to work under those terms is a very valid question. The only thing in my favour is that my life expectancy (keep your fingers crossed) is 19.2 years so it looks like I have to make a business decision to stop writing Insurance policies at the latest in 16.2 years but perhaps it will be a lot earlier than that..
No surprise that the man from Suncorp likes it, given that Suncorp has been eroding its adviser channel (Asteron) while ramping up its dodgy direct channel (AAMI).
So much easier to sneak in lots of fine print exclusions when consumers aren’t receiving any professional advice. Why consumer groups are supporting this is a complete mystery.
Does anyone know what Mr Linden is talking about. He should have a good look in his own back yard considering that ISF’s like Australian Super underhandedly introducing what could only be described as a “Vegie Clause” into their TPD definition. Also I can’t see anywhere where their PDS explains the Tax implications of a TPD benefit payout…Mr Linden crawl back in the hole you come from.
Okay…so the strategy goes like this assuming the proposed 3 year retention clawback is not retrospective and will only apply to new business from 1st
Jan,2016.
Rewrite every possible existing risk client over the next 18 months to the 80/20 model ensuring all advice is first and foremost in the clients best interest and satisfies the clients needs and objectives.
Not only will the adviser receive an appropriate level of remuneration for the initial advice in the form of 80%, but the advisers ongoing commission may well double, or in the case of much older risk policies, triple the level of ongoing remuneration.
To offset the impact of the future reduction in Upfront commission of only 60%,the ongoing remuneration to the adviser will have increased substantially allowing for greater cash flow.
For those advisers who are fed up, employ this process over the next 18 months, wait until the renewal income stream is bedded down and quantifiable and then sell your business for a multiple of 3-3.5x renewal income, thereby doubling or tripling the sale price and then get out.
The absolute stupidity of the ridiculous situation was designed to address the level of so called “churn”.
If the insurers think they have experienced churn in the last decade, then they haven’t seen anything yet!
So, when the proposed system arrives at the 60% initial commission level on 1st July 2018,the adviser will then simply provide the client with an invoice for an Adviser Advice Fee in addition to the commission payment for the difference between the 60% and the current Upfront commission level.
The adviser will then be remunerated partly by commission and partly through a direct payment by the client for the advice and implementation process.
We hope Josh Frydenberg and Mathias Cormann are having a cigar on us!
“The Liberals…Champions of Small Business”.
Not that my last letter to me had any impact, but here’s the final sentences of my email to Josh Frydenberg on these proposals:
Im afraid that while your intentions in relation to improving the quality of insurance advice and the insurance industry were sound, the proposals you appear to be endorsing will not deliver on your intentions. You had a real opportunity to listen to advisers that work in the bests interests of their clients and to make a lasting legacy with some long-term, meaningful and positive changes, but by endorsing these proposals that will ultimately only benefit the insurance companies, you have failed.
Will there be some way that the insurers can have a ‘compassionate grounds’ clause in writebacks? BRAINSTORMING HERE: if the client can confirm that they simply cannot afford the premiums due to having been made redundant for example, and must reduce or cancel then advisers and conversely clients (whom I intend on charging for lost commission if they up and run within 3 years) don’t get penalised for that? Surely a parameter can be put in place that ensures this doesn’t get abused but it is absolutely necessary. There’s no way I can send a client experiencing financial hardship an invoice asking for my lost commission. Churning was never about cancellations due to hardship, but now advisers are getting penalised for it?
I just don’t feel the AFA and FPA went to bat hard enough for advisers and consumers in letting the 3 year responsibility period through. It’s feels like they just settled for anything in order to get something through in time. I’m very disappointed and disillusioned today. I’m also feeling very cynical, receiving emails from all the insurers with their various positions stating ‘they never stopped and never will stop supporting advisers’. Stop using empty words, help us get out of this mess for the good of the Australian consumer and all the small business owners who support you.
From a colleague: “We will now work in the only industry in the world where you might get paid $1,000 and wonder if you’ll get to keep it all over 3 years, what a worry that will be for small business”. This is a dark day for advice in Australia. The government thinks they’re acting in the best interests of consumers but in their short-sightedness they’ve single handedly condemned consumers to a bigger underinsurance problem and eventual reliance on the welfare system as clients will turn to no-advice models. There will always be clients who will want, need and can afford advice and more power to the advisers who have the innovation and drive to capture that shrinking market, but the government has just taken that choice of quality advice away from thousands of Australians by pricing them out of the market. For shame. There are no winners in these reforms, except perhaps shareholders of big companies – and are we really surprised by that?
I wonder if the 3 year clawback period was designed to dovetail into the “immunity from false disclosure after 3 years loss of benefit” principle, as per the Couper case?
Between the new clawback regime and the Couper ruling, there is a strong deterrent against advisers ever switching their clients into a better product. This is a huge win for the entrenched insurers like AMP and MLC but you have to wonder why some of the newer and more innovative providers like Clearview, BT and Macquarie supported it.
These reforms should be targeted at the Lack of supervision by the licensees first ie strengthen monitoring and enforcement; THEN do the reduction in commission as a last resort. increase the Audit system within each licensee which will weed out those advisers that are churning, and leave the rest of us alone to do the right thing by the client.
Imagine if you did all the work associated with providing advice to new clients, and placed several of these new clients with a provider because they offered the best value for the client’s needs. Then shortly after the provider decided to overnight raise their premiums by 85% with only a month’s notice (*coughTALcough*).
Suddenly, the policy is no longer appropriate due to an increase in premium costs to the client of 85%!!! You have to redo your SOA, find a new provider, and due to the clawback feature, pay back the provider your commission you received for your work.
But ‘apparently’ EVERY case of insurance switching is due to an adviser churning, never due to a change of client circumstances or the actions of the provider.
The ‘solution’ is then to take an estimated $225 million per year from advisers and give it to providers.
Brilliant. 🙁
[quote name=”DM”]Let’s see if the product providers reflect this in reduced premiums. They have been strangely silent throughout this discussion. I imagine in some cases a halving of commissions paid will do wonders for THEIR business.[/quote]
AMP have already introduced this and – surprise, surprise – not a cent goes back to the clients.
As the adviser representative bodies I would appreciate if the AFA and FPA could provide an explanation, in detail and preferably with underlying assumptions and calculations, of how a new advice business could be commenced under these guidelines given that they are workable apparently.
“…given the significant detriment to consumers identified by last year’s ASIC report on life insurance, including that 37% of advice provided was inappropriate for the client.” Matthew Linden, Industry Super Australia’s director of public affairs said.”
This makes me wonder if 37% of insurance is Industry Super based insurance, notorious for being very poor when it comes to make a claim.
My comment is obviously tongue-in-cheek, but it is hypocritical for ISA to discuss quality of insurance, whilst actively campaigning against insurance advice.
Sound financial is the bane of ISA, both in terms of super and insurance, hence why they spend all their time attacking and seeking to undermine advisers, which in turn, leaves Australians worse off financially.
[quote name=”emkay”]FSC, FPA, AFA are clearly being led by the nose by their pay masters, the banks.
Banks profits increase, less competition, an APL that has other providers on it, but requires special permissions to use (you know who I mean AMP & MLC)and we have the makings of a fantastic profitable year for the distributors. Don’t worry about the consumer, no reduced premiums, conflicted advice, so they can go to hell as well.[/quote]
You’re harsh but true. I think the commission change is positive But once again the pain is on the adviser and nothing at all for the client who will not see reduced premiums because the manufacturers will keep the comm difference. The people who have created the culture, the manufacturers and institution owned licensees once again get away with no, or virtually no, pain. You named two, just add the banks and they are who should be investigated clinically to find the real cultural problems.
Not great and I really want to see all these emails from insurers tell me how much our clients premiums will reduce.
I can work with it. I agree with the client how much I am going to charge for my advice and that I can offset that with insurance commission received. I also tell them that if they cancel within 12 months I will send them an invoice for the balance. This will now be 3 years.
Emkay – my license is with one of those and in my experience that is not the case. The policy I put in place yesterday was with TAL and also increasing the clients industry fund. The one before, Zurich and it was replacing a ‘licensee’ product. Before that OnePath.
My clients pay me, not the providers.
FSC, FPA, AFA are clearly being led by the nose by their pay masters, the banks.
Banks profits increase, less competition, an APL that has other providers on it, but requires special permissions to use (you know who I mean AMP & MLC)and we have the makings of a fantastic profitable year for the distributors. Don’t worry about the consumer, no reduced premiums, conflicted advice, so they can go to hell as well.
The lower commission proposal isn’t great, but better than the $1,200 IAP proposal, but the real issue I have is the 3 year claw back. Without a doubt the FSC and the life company executives will be celebrating that win in their ivory towers today!
Heaven forbid a client’s circumstance changes in 3 years. Only a politician with their guaranteed term and lifetime of ‘entitlements’ would think that people’s circumstances don’t change.
So we have the Libs doing whatever the FSC tells them to, the ALP doing the bidding of the Unions and ISA, and anyone in between, well sorry, you don’t count!
So in effect an adviser could go into a mining company, work him or herself to a standstill providing advice to protect families, whilst providing employment for admin staff and paraplanners…and because someone in government imposes a new tax or there is an economic issue, 100% of the remuneration paid is refundable to the insurer even though the insurer got 11 months of premiums to pay its own BDM’s and staff. Yeah….makes sense NOT!
The government wanted no more than 4 times ongoing upfront, so the people who take our money settled on 3 times and the same 20% ongoing? What happens to level commissions?
Great news for clients, this must mean the insurance companies will be reducing premiums given they have just saved themselves approx 20% (on current hybrid commission structures) that would of gone to the adviser in the 1st year…. hmmm doubt it! Even better, if the clients circumstances change and that insurance product no longer remains in their best interest the adviser gets penalised by doing what is right.
As a ‘young’ adviser starting out trying to build a business I struggle to see a prosperous future for this industry (particularly for business owners). If I didnt love it and the satisfaction I get from helping clients who would bother.
60% on upfront commission, then you take the dealer group split and Pi cover. Im done to 35% and that’s if I don’t have to give a referral fee percentage.
I don’t think these people realise there are in fact splits which are taken from the dealer group before we are paid.
They think we get the full commission from the life companies, that is not the case.
It’s bullshit.
To DW… You need to understand that if the respective associations did not come together to form a solution, Government would have done it for them…. and Government would be far harsher than what is being proposed. Yes challenges exist, yes we will be getting paid less for the value we deliver. But it could be worse. More reason to consider a fee for service model or a hybrid. The frustrating part is that even though the income for advisers is being limited I cannot see how this will be passed on to the client. A win for the insurers?
No mention of open APL’s. What a surprise. Business as usual for the Banks.
When the revenue available decreases less advisers will join the industry, less people will be able to start advice firms, less clients will be covered (which will lead to increased premiums) and there will be a greater cost to the government through the disability pension and medical costs. The real loser is the consumer especially the consumers earning lower wages as they will not be able to afford insurance. The real problem are the firms that are aligned to an insurance company that just sell the one product. More scrutiny on advice standards and less on commission would have achieved so much more.
Whilst this may not be palatable – the alternatives that were published (Trowbridge’s suggestion or no commission at all) were significantly worse. I would imagine the AFA and FPA fought hard to keep hybrid commission on the table after the publication of the Trowbridge report. Whilst its not ideal – they deserve our thanks for their hard work
Let’s see if the product providers reflect this in reduced premiums. They have been strangely silent throughout this discussion. I imagine in some cases a halving of commissions paid will do wonders for THEIR business.
IN MEMORIAL
The Life Insurance Industry in Australia passed away on the 25th June 2015 (suddenly but not peacefully).
The Funeral services will be held progressively between 1st January 2016 and 1st July 2018.
The Life Insurance Industry was established in Australia in the 1830s to look after the well being of widows and children and to protect Governments by reducing the burden of vulnerable people on Government expenses.
The Life Insurance Industry will be survived by what can only be described as a half hearted attempt to placate the Financial Institutions of Australia.
In lieu of flowers, memorial donations may be made to the families of all those hard working, well intentioned, passionate risk advisers left behind in the wake whilst trying to look after their “clients best interests”.
Our deepest sympathies are extended to what will become the remnants of a great Industry.
Rest in peace!
I disagree with DW! Our business has been on a hybrid model for over 10 years & we have seen our income increase substantially! This is not a big leap for us. But I understand the concerns of advisers regarding the changes ahead. Bear in mind, the outcome could have been a lot more onerous & I’m relieved the major associations united to get the best possible outcome rather than the Gov’t forcing change along the lines that the ISA wanted! So just get on with it, adjust to the changes (you’ve got 3 years)& if you have your model right, you’ll wonder what all the fuss was about !
This represents a 20% cut to adviser remuneration. How can the AFA support this? Are they acting for the product advisers or advisers? And where is the FPA on this? The future is very bleak for independent advisers, and for consumers who seek advice.
The critical question for consumers is whether insurance premiums will fall commensurately. Has this been confirmed or are the big instos once again faking a higher moral ground and pocketing the difference?
The adviser network will virtually become unemployed on January 1st with clawbacks over the first 3 years we will be working for free and will not survive maybe we should all go get a job with the FSC banks as they will love this.
Everyone needs to resign from there association AFA FPA today and then see if we get some support.