The life insurance framework
The newly proposed industry reforms won't stop advisers from helping Australians or from continuing the good work they do.
The announcement today of the Life Insurance Framework (the Framework) comes after four years of pressure to change commissions on life insurance.
The former Labor government, in excluding life insurance commissions from FOFA, made two very clear points. The first was that commissions have a role to play in insurance. The second was that the industry had to deal with the issue of 'churn'. Numerous consumer groups disagreed with the first point and continued to call for a complete banning of commissions.
The FSC, AFA and FPA held discussions about Labor’s concerns around churn in 2012 and the FSC wanted a three-year responsibility period at 100/75/50 to be introduced. We didn’t agree. Ultimately, the insurers could not agree either and nothing changed.
ASIC, following on from Labor’s concerns – and no industry action on the issue – conducted a targeted surveillance of retail life insurance advice. They released Report 413 on 9 October 2014 with the headline result that 37 per cent of life insurance advice failed compliance, and that 96 per cent of the failed advice was written with high upfront commissions (being over 100 per cent in year one). This report began a concerted campaign from several groups to call for all life insurance commissions to be banned.
Experience proves that commissions have a valid role to play with respect to life insurance advice, yet the headwinds to remove high upfront commissions were clearly evident. Neither side of politics had any appetite to allow commissions over 100 per cent to remain.
We recognised at the AFA that there was going to have to be change this time to satisfy the public pressure generated by the ASIC report, and we could either leave it to the insurers to craft that change on their own, or we could ensure advisers were represented. Clearly advisers had to be represented so we formed the Life Insurance and Advice Working Group (LIAWG) with the FSC to get a unified industry response. The LIAWG appointed John Trowbridge as the independent chair and he released his final report in March 2015. It was not a unified response – the AFA disagreed with a number of the recommendations.
What the Trowbridge Report did achieve was an opening up of the negotiations to reach a final position to take to government, which has an obligation to take action on life insurance. The Financial System Inquiry (FSI) made a recommendation in November 2014 that only level commissions be available to advisers. We saw the FSI recommendation as a last-minute, poorly conceived inclusion in the final report, but it placed a firm marker that the government must respond to.
The process to getting a united industry position has meant a number of difficult negotiations on behalf of our members. This was never a level playing field – advisers never held equal power as advisers are price-takers. It is the insurers that set the commission rates and other terms like clawback. But we weren’t powerless either. Advisers write 50 per cent of the $14 billion in life insurance premiums in Australia.
We maintained a focus on the accessibility and affordability of life insurance for Australians, and of course the sustainability of our members’ advice businesses. We also ensured that insurers had to look at their own conduct and the influence it has had on advisers. We did achieve a shared blueprint with the FPA and having a united position was very important in earning the transition arrangements in the final framework.
The negotiations had to take account of calls across a complete spectrum – from some companies that wanted all commissions removed to some that thought a cap at 100 per cent could apply. There was considerable pressure to allow level commissions only and at just 20 per cent.
Advisers who want to reject the framework need to realise that with or without this deal, commissions on life insurance were going to change, as were clawback arrangements. The pressure to deal with those two issues was immense because they are perceived by media and consumer representatives to drive the incentive to churn clients. If the advice associations had not been at the table, the outcomes would have been far worse.
We pushed hard for current hybrid arrangements to remain as the long-term solution, and we still believe that would be an appropriate and effective outcome, but there was not enough support from stakeholders to achieve that.
The final position represents a compromise that, whilst challenging, is at least workable over time for most. We know it will be vitally important for the AFA to support members to adapt and change and we make that commitment to you. It is a big challenge to be open to change, and especially where it feels as if it is being imposed on you. Together we need to confront each of the roadblocks and get past them.
I also wanted to thank the many advisers who have contributed positively to the debate. Your ideas and support throughout the last eight months have been very important to helping us avoid an outcome that could have been far worse. It is essential though that our advice community continues to work together and support one another throughout the next three years as the transition takes place.
One final message – and this is directed to advisers that currently rely on upfront commissions. Most likely this announcement will cause you to feel angry, disillusioned, a sense of loss, and even fear for your future. A change of this scale is difficult to face. It is important to reflect that some advisers are already successfully working with hybrid commissions, some with a fee as well. There is a future here, but it does mean making significant change. The AFA will provide the support to lead advisers on this journey.
Advisers do a great job. You are important to the lives of millions of Australians. This change won’t stop that.
Brad Fox is the chief executive of the AFA
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