The exclusion of statements of advice (SOAs) from the first round of draft legislation has garnered the most attention among the advice industry; however; the proposed law includes measures that will clarify the rules around conflicted remuneration and the addition of one-off consent forms for commissions from life insurance.
Recommendations 13.1 to 13.5 from the Quality of Advice Review (QAR) final report, which were previously accepted as part of the government’s response in June, relate to clarifying the rules around conflicted remuneration and the removal of exceptions within the Corporations Act that would no longer be necessary.
According to the explanatory memorandum that accompanied the draft legislation published on Tuesday, the main purpose of these amendments is to clarify that conflicted remuneration relates to benefits provided by product issuers to financial advisers, not those given by a client.
The explanatory memorandum said: “The new definition builds on the former one, so that conflicted remuneration means:
- any benefit (monetary or not) that is given to a financial services licensee or representative of a financial services licensee, who provides financial product advice to retail clients; and
- that because of the benefit, could reasonably be expected to influence the recommendation or the advice given by the licensee or their representative to the retail client;
- but the benefit is not given or paid by a retail client (or on their behalf) to the licensee or their representative for financial product advice received by that client.”
The effect of amending the Corporations Act to remove any ambiguity on the source of conflicted remuneration results in a streamlining of the act, with a number of exemptions able to be removed as they will no longer be necessary to allow, for example, clients to pay for financial advice through their superannuation account where it relates to their interest in the fund.
Recommendations 13.7 to 13.9 relate to obtaining consent for life insurance, general insurance, and consumer credit insurance commissions. The draft legislation would retain all of the current caps on commissions, such as the 60 per cent upfront commissions and 20 per cent trailing commissions, with a two-year clawback for life insurance.
In relation to life insurance advice, the consent will be one-off and apply for the duration of the policy.
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).
“The review found that the current commission arrangements for life risk insurance products should be maintained. This includes maintaining the current arrangements for clawbacks and commissions,” the explanatory memorandum said.
“However, the review found that, 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.
“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.
The long-term goal of this recommendation is to work in concert with the rest of the reforms to incentivise the provision of risk advice through fees and reduce the reliance on commissions.
“The intention is that the other recommendations will encourage more providers to offer to provide life insurance advice for a fee paid by the client and that over time commissions will play a lesser role in the distribution of life insurance,” QAR lead reviewer Michelle Levy wrote in the final report.
For more insight into the first tranche of legislation, specifically recommendations seven and eight, click here.
The current law is actually correct. [b][i]All[/i][/b] forms of remuneration are potentially conflicted, including fees paid by clients. At the moment client fees receive a special exemption to the conflicted remuneration rules, because the [b][i]intention of the law is to ban third party remuneration, not conflicted remuneration.[/i][/b]
Changing the law to incorrectly define conflicted remuneration as only that remuneration paid via third parties is counterproductive. They should change the wording of the law to [b][i]”third party remuneration”[/i][/b] if that is what it is actually targeting.
I’m assuming that mortgage brokers and general insurance agents also need to have clients sign a commission consent form?
No – Mortgage Brokers do not need clients to sign a commission consent form but are certainly required to fully disclose what they get paid same as a Financial Adviser.
“The intention is that the other recommendations will encourage more providers to offer to provide life insurance advice for a fee paid by the client and that over time commissions will play a lesser role in the distribution of life insurance,” QAR lead reviewer Michelle Levy wrote in the final report.
Yes, do the more of the same – very likely to get the same result Michelle Levy. Please don’t later say unintended consequences.
“The review found that the current commission arrangements for life risk insurance products should be maintained.” Did the review actually consult with Australian insurance companies, and discuss the state of the industry? Sounds like it didn’t because the state of the risk industry is pretty dire and they need to insure more people to increase the insurance pool, for sustainability.
“The long-term goal of this recommendation is to work in concert with the rest of the reforms to incentivise the provision of risk advice through fees and reduce the reliance on commissions” Well, this won’t work and is what most advisers are telling government.
So, it’s only conflicted if the service delivery is not directly controlled by the product provider?
“However, the review found that, 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.” Pity they can’t apply this same approach to Mortgage Brokers and Real Estate agents. I wonder why? Property conflicts perhaps? A Fed Govt. that supports a property boom at all costs?
Mortgage Brokers actually do have a legal duty of care to act in the best interests of the client and also fully disclose commissions receivable……same as Financial Advisers.
Here we go again, where so called reducing BS Red Tape Regs actually increases it & Advice costs with duplicated Life Ins Comms consent.
Have Advisers not already presented an SoA with any Life Ins Comms, Upfront & Ongoing fully disclosed and signed off ?????
Why, how, WTF is this being duplicated for ??
It is being duplicated because most advisers put this on page 18 of their SOA and clients don’t actually understand it.
Advisers should also provide a costed option that includes no commission (ie with 30% lower premiums) but a fee for service, so the client can see they are the ones actually paying the commission
Is this costed option to be charged to the client regardless of the success of the application or otherwise? How is the client ‘better off’ paying a non deductible fee for the placement of insurance rather than commission via Life & TPD cover (deductible via super), IP (deductible personally or via super) and Trauma (non deductible)? That’s something the “Commissions are the work of the Devil” Brigade struggle to spell out.
Risk Insurance advice is now dead.
The only glimmer of hope & common sense left in the realisation of the fact that the current remuneration model has been an abysmal failure has now been entirely removed.
It is completely astounding that when the client has signed off on the acknowledgement and acceptance of the commission structure the adviser will receive for years, they now say the client must sign an acceptance of the commission paid.
This is simply insane and inept legislation management of the highest order possible.
You simply could not make up the legislative process that has surrounded not only Risk Insurance but Financial Services over the last decade or more.
It is simply incompetent, conflicted and clearly identifies the people who are forming these policies have no idea whatsoever how this business works at all.