Financial services reform sought to introduce the era of the professional adviser. The institutions reckoned on their brands standing behind the advice process; they were trusted names embedded in the lives of the consumer. The banks exploited this advantage – new advisers with limited experience or qualifications were rushed into advisory roles; soft skills were favoured over knowledge and brand accounted for trust.
By February 2009, the government, watching the unprecedented growth in the sector, managing its way through the GFC and witness to a number of product failures, established the parliamentary joint committee on corporations and financial services inquiry into financial product and services provider collapses. Product failure was at the centre of large scale consumer loss.
The response to this was to envision the Future of Financial Advice (FOFA), a plank in Labor’s policy platform in 2012. FOFA was enacted by Labor just prior to their electoral defeat and became mandatory under the Coalition government on 1 July 2013.
By 2016, the Life Insurance Framework became a precursor to the ban on commissions. It was driven largely by life companies in response to the underwriting ‘crisis’ of 2013-14. Heavily regulated advisory processes had failed to achieve their intention; calls for a royal commission into banks were becoming louder and the bidding war between the Turnbull government and Bill Shorten’s Labor was commanding public attention.
Upfront commissions became the scapegoat, and the beneficiaries of the changes, the insurers, pressed government for change following the 2015 Trowbridge review.
The government’s intention in moving from a commission base to fee for service was based on the assumption that the primary motivation of advisers would be aligned with their client’s ‘best interest’; yet at the time of the amendments there was no merit test for advisers or institutional management. Until recently there was little or no weight given to the consumer attitude towards paying fees, especially for personal risk advice.
This has resulted in the following:
❖ Consumers are now less likely to be insured and for lower amounts. Underwriting is increasingly done at claim and not inception and as a result forming a large part of the spike in claim denial by underwriters;
❖ There are less policies in force, sums insured and total risk premium has declined;
❖ The consumer has seen increases in premiums across the board of between 12-25 per cent over the last two years despite commissions falling at least 30 per cent; and
❖ The value of an enterprise traditionally priced as a multiple of annual revenue has also fallen, and as a result many experienced agents who cannot see any future remaining in their business have either left or indicated that they will leave over the next two years.
The legislation flow from 2001 through to 2017 failed to achieve greater consumer protection, choice, integration and innovation of products and services. It failed because it didn’t address the commercial realities of customer/product/adviser relationships and ignored the complex vested interests of those with market scale.
The reform of life insurance commissions was no different. It conflated commissions with conflict and essentially worked the legislative solution into this mindset without an appreciation of the sector in question. Commission of itself cannot be conflicted any more than time-based fees can be said to be conflicted. There are many contributors to conflicted interests and remuneration may or may not be an essential element.
For example, the sales targets and marketing forces of institutional distribution networks are not similar to the socio-economic drivers of small professional advisers. To confuse this confuses the very different economic landscape these channels operate in; one driven by budgets and reviewed with career challenging benchmarks, the other determined in large part by forming personal relationships that underwrite the value of their own business.
Instead, the law had the effect of infantilising the issues at stake. It created a single yardstick by which to measure adviser/client relationships and missed an opportunity to introduce a fiduciary role for the adviser.
A principles-based approach to issues identified by industry, consumer groups and politicians should have been the starting point for all legislative attempts to achieve better outcomes for the consumer and the reputation of the profession.
By using the blunt instrument of legislation, ethics, which should otherwise form the primary basis of our consciousness and guide choices and actions, have been replaced with codes of conduct. The conduct of industry participants is determined more by the values they hold than the codes prescribed. The prescriptive regulatory environment both consumers and advisers find themselves in does not assist establishing meaningful dialogue when two parties come together.
The government set out to protect the consumer by lowering fees and inferred that the mischief was created by the greed of advisers and agents. In fact, the changes will not, of themselves, overcome malpractice and are likely to have a detrimental effect on the insurance industry by driving out good advisers and enforcing a regime that does not encourage consumers to ensure they are adequately covered against risk.
Sadly, Minister Jane Hume has stated that the government’s agenda is to have financial services off the table by the next election. This is a scorched earth intervention.
This deficient approach to public policy has been catastrophically carried into other areas of regulation so tragically on display over the summer, with large parts of the country on fire.
Look no further than the damage that unmanaged fuel loads have contributed towards recent bushfires, with the destruction of 1 billion animals, 5 million hectares, 2,500 homes and many unnecessary deaths, the worst catastrophe since Victoria’s ‘Great Fire’ in 1851.
That event resulted in the burning of approximately 5 million hectares, the second largest area in European-recorded history. It killed 12 people, more than one million sheep and thousands of cattle, to say nothing of native fauna.
It also sharpened our skills in dealing with hazard reduction and fuel loads – lessons now ignored. Instead, government policy across state and federal jurisdictions has embraced an approach to managing the land that ignores thousands of years of land management skills of our own Indigenous people.
There are similarities between the meltdown in the financial services sector and the bushfires – the common element are those making policy decisions based on ignorance and ideology, implementing regulations that are antithetical to the interests of people.
The financial services sector is being burnt to the ground, make no mistake. The consequences will be felt for decades to come, long after politicians have retired. People are already now uninsured and many are uninsurable following the introduction of compulsory cancellation of funds with low balances last September.
God help the financially illiterate and/or time poor working Australians… It will take less than a generation to see the charcoaled remains of current government policy.
Scott Heathwood, director of strategic planning, Lifestyle Asset Management
well said and thought out Scott
if there was ever a time to just defer/slow down the reform agenda it is right now. The exodus of planners will only mean job losses across the sector (such as para planners, support staff etc). For the industry associations, it is time for you to communicate this to Politicians and the ASIC. It just does not make sense to push these reforms through at this moment in time.
Scott makes a number of good points. What he doesn’t mention is that this scorched earth policy is due to our own bad and conflicted conduct. We reap what we sowed in abundance. Until we fix our own house and stop allowing sales people to call themselves advisers we will be treated worse and worse until we disappear.
We are simply too much trouble in the short and medium term to make the huge long term costs of the current approach to be particularly relevant.
One point re risk commissions: Unless you were on 140%/10% or similar and churned your clients every 3-5 years, the current policy is a reduction of 15-20% only (a bit more for level premium policies) in earnings. That is on the income side but the expenses have also gone up with the increase in compliance.
Hi anonymous. Good response and an accurate depiction of what’s been going on for far too long – and what I have also been saying for a couple of decades – not that it’s a competition – just saying it’s not new and I’m sure you’d agree. Here’s a question: Why not post with your name? Doing so anonymously reduces the impact and effect. We all need to be accountable and stand behind what we say, especially publicly. Thanks for being honest Now, some courage! And, selling life insurance is teh problem What needs to be sold is advice on life insurance – paid for whether the advice is taken or not Commissions are always a conflict of interest because they require a transaction to occur for someone to get paid. Sometimes the advice needs to be: “Do nothing.” or “sell or close that policy.” And that advice should be paid for if it’s good advice…
Insurance commissions have historically reimbursed advisers for two different cost elements:
– the cost of advice provided to the client
– the cost of policy implementation performed on behalf of the insurer
You are quite right to say that clients should pay advisers directly for the advice component. But similarly, insurers should pay advisers for the implementation component. It is a cost that would otherwise be incurred inhouse by the insurer. They are outsourcing it to the adviser, just as they outsource costs such as IT contractors or medical testing. It is inappropriate to charge clients directly for those costs.
With commissions now at 60/20 that is barely enough to cover the implementation work an adviser does for the insurer in most cases. Advisers should be charging advice fees to the client AND receiving commissions for the outsourced implementation work they do for insurers.
I’m not sure who you are referring to as “our” and “we”, but you certainly don’t speak for me.
The whole financial adviser community is currently being persecuted for the behaviour of a minority. We are treated as all being the same, and treated as if we are all equally culpable and guilty. It is like persecuting all Muslims for the behaviour of a terrorist minority.
If you are admitting to poor behaviour, then why not F off out of the industry altogether and take your dodgy mates with you. But don’t be offering up mea culpas and pretending to speak for honest, ethical advisers who have done nothing wrong.
Educated well thought out article, highlights the problems well with obvious research and knowledge, thanks
when you throw in phrases like scorched earth and equate Fin Services to the bush fires and then blame the Government for the whole lot, we know you have no coherent argument to make. Then to top it off you think strategies employed thousands of years ago with a tiny population and no houses or infrastructure gives answers for today – in the same breath you criticize the use of ideology.
Yes, both Governments have used band aid solutions which lead to over-regulation that is extremely costly…but industry bodies and advisers such as yourself should guide elected officials. I bet you mostly did nothing or just proposed the Government do nothing…so in the end they did a lot instead.
“but industry bodies and advisers such as yourself should guide elected officials” – That is the problem. The government ran with what they though was best without any consultation with Advisers, or Industry Bodies. Now we have a heap of unintended consequences which outweigh the issues they were trying to solve.
perhaps you’re right..and if you are, that falls to the executives at Licensees not lobbying Government. Pre FOFA there was a lot of opportunity to do so..though I dont recall CBA execs doing much lobbying but protecting their bonuses.
Unfortunately Scott no one is listening!!!
well, that was eloquent and accurate. all of the bandwagon types who laud the new era of reform at any cost need to pay heed.
Reform was definitely needed, BUT not (as described above) in the form of a scorched earth policy. Risk commissions have come down by far more than 30% , it’s more like 50% and yes i know the ongoing is higher. however the other massive increases in costs , Compliance & PI to mention just two has meant that the gap between those who can afford to get risk advice and those who can’t is widening by the day.
I have always found it bizarre that the life companies thought that by lowering adviser remuneration they would repair their own mistakes and poor management of their various books of risk business. I guess it’s no small coincidence that the cracks didn’t really appear until the banks got involved and of course we saw the demise of Whole Of Life insurance, which is still sold in other parts of the world today. it was the base foundation around which a meaningful long term profitable (for company and client alike) life insurance program could be built. but what would I know? after 40 years of watching a 200 year old industry slowly destroyed by corporate greed and ineptitude i long for the return of mutual societies. …… i guess it’s just a pipe dream.