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
ehmmm
I agree! A lot of advisers don’t seem to understand:
1) This just changes the *timing* of the payments, not the total amount (in fact 20% renewal over the long term will be worth a lot more than 10% renewal if the business sticks around). Good advisers are better off under hybrid commissions.
2) Advisers can still charge whatever they want, this just limits the amount that the LO pays. If you think your advice is worth more, then convince the client of this and convince them to pay it.
3) It is ridiculous to sell stepped premium insurance to 46yo then act surprised when that premium increases a lot next year. That’s the nature of stepped premiums! You should be presenting the projection of premiums over time to your clients. If you don’t like it, sell level premium insurance.
There is little in these comments to be embarrassed about. Many advisers have had their incomes cut and even more uncertainty introduced to their business for no tangible gains to our clients. The licensees and life offices business practices in continuing to incentivise, enable and then turn a blind eye to those that churned client policies unnecessarily has been laid at the feet of every adviser, particularly those starting out in this business. Once again we all carry the cross for the unethical advisers behaviour, which we cannot control but licensees and insurers can. Ethics is about what actions you take and why you take them, not how your clients remunerate you – be that directly or via the insurer.
Unless red tape is cut and life office application and underwriting processes improve dramatically in terms of reduced adviser involvement, I will be unable to provide advice to everyday Australians that are least able to afford the non-refundable fee for service I will need to charge upfront. Their only solutions will be direct insurance, for likely an inadequate sum insured, with no advice as to the consequences of ownership structure or impacts of beneficiary choices and possible tax consequences, no service when client circumstances change, no underwriting and therefore little certainty of claim payment and poor definitions against which to claim.
Those planners who don’t deal with the masses, just the wealthy whose premiums are much higher based on larger sums insured, won’t feel the pinch. Those providing advice to those that can least afford to pay for it will be the ones who wear these changes.
OMG – let’s hope the press don’t get to read these responses, this is embarrassing.
3 year responsibility period – consider this!
We did some business on a client 12 months ago. Not replacement business, New Business. His premium has now come up for renewal (10/7). Premium Increase on a 45 year old of 23.6%. At this rate his premium will double in just over 3 years. How can I accept the newly “negotiated framework” when some premiums are doubling every 3 years. This puts into question the client’s ability to maintain the policy. It’s the L/O’s that determine premium levels not advisers, so we have not control over our futures based on a 3 year responsibility period. “Clients best interest” has gone out the window for “L/O’s best interests”.
SHOW SOME SIGNS THAT YOU UNDERSTAND OUR INDUSTRY BY APOLOGISING FIRSTLY AND THEN CHANGING THESE ABSURD RULES!
Which other occupation works under the system that you can have your income taken off you over a three year period. In fact what other occupation allows anybody to take back your income which you have well and truly earned. The compliance costs for providing your expertise are ludicrous. What occupation needs to provide an 86 page dissertation to justify every piece of professional advice you give to a client. Does a solicitor, accountant, surveyor, anybody? Oh that’s right no one else. Does anyone know of any clients that have complained about paying commissions to advisers for the provision of good advice. I doubt it. FOFA. Best interest of the client. Where in any of the rhetoric has anyone mentioned the client. It hasn’t even come into the conversation. Chronic under insurance in Australia. Let’s take away the main avenue for the ordinary clients to obtain insurance and put a fee for service invoice in front of their faces. Sneaking suspicion the bulk of these clients will not be able or want to pay it. Result – no insurance. How in the world do these ridiculous ideas ever get any backing. First and foremost how is it beneficial to the client. If it’s not then don’t implement it. All that is happening is that the insurers will keep the money stemming from reductions in commissions. Banks and online insurers will get more business without actually providing advice. Clients will be the big losers. BEST INTEREST of client. I don’t think so.
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..
Costs & restrictions continue to increase. Now they are messing with our income. Are they for us or against us?
We talk about ‘best interest’. For who? In 40 years I have never had a complaint from a client about the commission that I was paid.
It all comes down to the consumer. As for fee for service, many are already struggling to find premium dollars, so to start charging fee for service, they will either decline buying insurance, or go to the direct TV insurers, who are the mob that the authorities should be going after.
What is wrong with commission? We are qualified advisers & deserve to be paid accordingly. Would the people who make these rules from their ivory towers take a 30% initial pay cut? We should be trying to make this vital industry attractive for newcomers. With regard to underinsurance or no insurancee, who pays when deaths or disability occurs? Centrelink via the taxpayer!
Here we go again. Although Brad says they were there to ensure that insurers ‘looked to their own conduct’ it doesn’t appear that the changes in the new Framework will have any difficult effects on the insurer at all. When will insurers take responsibility for lapses caused by premium increases due to re-insurers adjustments? This whole debate is supposed to be about the client. Also well done skipping over the responsibility period issue. AFA did you pressure the insurers to lower premiums to make it more affordable for clients to keep their insurance? How did you hold them accountable? It seems the adviser is the only one taking any responsibility under this new framework.
Whats difficult ? the government cant dictate your earnings nor mine, how would you feel if they said you can only charge $2 a member think about it
Um thank you Brad your comforting words will be remembered while I wait the 3 years of any new business I write to elapse to know if I have even earnt any commission. Oh and to all the advisers wanting to sell there practices this has made our businesses virtually worthless, I know that my 28 years in this industry must not seem that important to the Associations that say they represent us.
Brad, why don’t you and your lot also take a 40% cut in your income? And just so we are all on the same page, if there is any change to anyone circumstances or a change in plans you have to give back 100 – 30% of your earnings.
So please do not tell new and smaller advisers not to be angry with this sell out when your own livelihood is secure. We know we do a great job, do not patronise us.
Brad,
With all due respect this is crap, the AFA and FPA have sold out the IFA’s of
Australia.
I would have expected ,more from you given you have been an adviser and run your own practice. The Insurance Companies over the past decade have slowly passed on a majority of the processing cost for writing new business to the Advisers under the guise that it will help us get paid sooner. What it really did was reduce their cost and increased ours.
NO Adviser receives 100% of the commission now, all of us have
to split our commissions with our Licensees and we have to pay GST on the
commission. So the argument that we receive the full commission is based on a
LIE.
As for the churning issue the biggest churners are the BANK sales staff, they twist business that has been place by Advisers who have spent hours providing the client with good advice only to have the BANK Adviser tell them that their loan application would not be viewed favourably unless they switch their insurance and superannuation to the BANK. Now the Adviser will yet again cop it in the neck because we will write the business in good faith only to have the business churned by the BANK sales persons and then the adviser gets the claw back.
This is WRONG!
Use the South African method, and MAKE the INSURANCE COMPANIES responsible for monitoring the CHURNING of business and instead of the adviser who original spent the time, effort and money getting the business on the books, make the CHURNING sales person cope the penalty. Reduce the payment that the CHURNER receives by the amount due to be clawed back. Then watch the churning stop.
I was a extremely loyal member of the FPA & AFA for many years, but I am glad I resigned from both associations, as you have done EXACTLY what I said you would do five years ago, YOU HAVE BOTH SOLD THE IFA’s out. You and your board should hang you heads in shame, as you have DESTROYED many small business today and wiped out the retirement funds of many good advisers as the value of their books of business have now be decimated.
I hope you sleep well tonight.
Mr Trowbridge was reported to have filtered-out all dissenting voices from his Committee in his report. The whole thing has been an institutional orchestrated deception from the start. Even the AFA walked away from Trowbridge. Fox you are just a mouthpiece for the large institutions who are immune from these changes because they have their advisers on a salary, and also happen to be the primary organisations responsible for conflicted advice. We understand that high upfronts are not sustainable, but Hybrid 80/20 should have been where this landed, not 60. There is no doubt that these changes are designed to squeeze-out the independent advisers in favour of the big end of town such as banks who have done nothing but sully the industry with their high profile advice failures, Senate enquiries and large compensation payouts to their victims. Insurance companies can now raise their renewal premiums beyond client affordability (as some have done recently) and when the client cancels or wants a better option, it will be the Adviser who wears the clawback for three years. Reverse selection (clients cancelling in the wake of large price hikes) accounts for far higher lapses than churning by unscrupulous advisers ever has. No the insurance companies are free to gouge the client. Australia suffers a chronic underinsurance problem which is a massive liability on the public social security system. If you want more people insured with non-conflicted insurance advice, then you should be encouraging your third party distribution, not sitting in your arm chairs making decisions to bolster your own organisations, reducing choice and killing off the competition.
Brad,
With all due respect this is crap, the AFA and FPA have sold out the IFA’s of Australia.
I would have expected ,more from you given you have been an adviser and run your own practice. The Insurance Companies over the past decade have slowly passed on a majority of the processing cost for writing new business to the Advisers under the guise that it will help us get paid sooner. What it really did was reduce their cost and increased ours.
NO Adviser receives 100% of the commission now, all of us have to split our commissions with our Licencees and we have to pay GST on the commission. So the argument that we receive the full commission is based on a LIE.
As for the churning issue the biggest churners are the BANK sales staff, they twist business that has been place by Advisers who have spent hours providing the client with good advice only to have the BANK Adviser tell them that their loan application would not be viewed favourably unless they switch their insurance and superannuation to the BANK. Now the Adviser will yet again cop it in the neck because we will write the business in good faith only to have the business churned by the BANK sales persons and then the adviser gets the claw back.
This is WRONG!
Use the South African method, and MAKE the INSURANCE COMPANIES responsible for monitoring the CHURNING of business and instead of the adviser who original spent the time, effort and money getting the business on the books, make the CHURNING sales person cope the penalty. Reduce the payment that the CHURNER receives by the amount due to be clawed back. Then watch the churning stop.
I was a extremely loyal member of the FPA & AFA for many years, but I am glad I resigned from both associations, as you have done EXACTLY what I said you would do five years ago, YOU HAVE BOTH SOLD THE IFA’s out. You and and your board should hang you heads in shame, as you have DESTROYED many small business today and wiped out the retirement funds of many good advisers as the value of their books of business have now be decimated.
I hope you sleep well tonight.