Risk commissions cap should be zero, says Hayne
The Hayne commission final report has recommended that the cap on risk commissions should “ultimately be reduced to zero” unless there is a clear justification for retaining them.
When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products, commissioner Kenneth Hayne said in the report.
He doubted that a complete ban on conflicted remuneration in respect of life insurance products would lead to “significant underinsurance”, noting that, as at August 2017, more than 70 per cent of Australian life insurance policies were held through superannuation funds.
“While it may not follow that every Australian who holds a life insurance policy through a superannuation fund has the same level of cover that he or she would be advised was appropriate on consulting a financial adviser, I am not convinced that a move away from commissions for life insurance products would see large numbers of Australians without an appropriate level of life insurance,” Mr Hayne said.
However, Mr Hayne accepted that the best way to be sure of the effect of lowering or removing commissions for life insurance products is to assess what happens as the levels of those commissions are reduced over the next few years.
He also acknowledged the financial advice industry will need time to absorb a number of changes over the next few years, and that there may be some benefit in deferring the implementation of further changes to arrangements for life insurance commissions.
As a result, Mr Hayne encouraged ASIC to take all necessary steps to ensure that it conducts its post-implementation review in 2021 “as expeditiously as possible”.
“If that review indicates that the cap on commissions has not contributed (or, at least, not significantly contributed) to underinsurance, then I would urge ASIC to continue reducing the cap – ultimately, to zero,” Mr Hayne said.
“Unless the reduction in life insurance commissions can be shown to contribute significantly to underinsurance, I can see no justification for allowing this form of conflicted remuneration to continue to be paid.
“While the decision will ultimately be one for ASIC, any decision that commissions should continue to be paid and received in relation to life insurance products should be based on clear evidence that the harm that would flow from abolishing commissions would outweigh the harm that already flows from allowing this form of conflicted remuneration to continue."
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