Risk products are not the same as investment products, but the Government’s FoFA proposal to ban risk commissions treats them the same. A Professional Planner/CommInsure roundtable pinpoints the very real dangers posed to the industry if an alternative to the FoFA proposal cannot be developed in time.
ROUNDTABLE PARTICIPANTS: JOHN BROGDEN, chief executive, Financial Services Council; SIMON HOYLE, editor, Professional Planner; TIM BROWNE, general manager – retail advice, CommInsure; GREG COOK, managing director, Eureka Financial Group; RICK DI CRISTOFORO, managing director, Matrix Planning Solutions; IAN SATILL, director, Special Risk Managers; DANTE DE GORI, general manager – policy & government relations, Financial Planning Association of Australia; RICHARD KLIPIN, chief executive, Association of Financial Advisors.
BROGDEN: We now have a new minister and a new-ish government, and the terms of engagement for the government have changed radically.
We think that the government’s position was moving towards banning commissions on group life product, therefore giving you a situation where if you bought commission-free superannuation, the life attached to that will also be commission-free, but leaving alone commissions on directly-advised.
I have no view on what the government’s position was with respect to direct insurance, and to his credit, the previous minister, Chris Bowen was brave enough at an AFA lunch, as Richard will recall, to actually open up this debate and use the correct argument that the problem of underinsurance could simply get worse. That’s before we even talk about the entire industry as to how that would work.
So the starting point is to get people to understand that life and risk products are completely different to the other investment products and financial services. You don’t walk in the door with a balance. You obviously walk in the door with a balance in your superannuation or you’ll have balance next week when the pay cheque arrives, and you self-evidently have to have a balance for an investment product. There is no balance for a life insurance product. So as a consequence it’s a different product.
I think the other argument that we probably have got ‑ to my knowledge, the industry hasn’t done well but I’m not an old player – is about the broader economic benefits delivered by insurance versus the massive cost to the economy, in particular the government’s welfare bill that would result with Australians not insuring themselves. I don’t know whether we’ve done that work and that’s a large piece of economic modelling to be done that would present that.
But I think that’s the first step. Until we know what’s happening there, the rest of FOFA is interesting but, you know, if that is a radical departure from what we have now then you’re talking about industry restructuring, literally.
DI CRISTOFORO: The view I’ve heard is exactly the same as that, where basically you’re looking at life versus everything else, and that it makes it all too easy for certain elements within the industry to say, “Well, this is how I’m going to deliver your risk insurance needs”. The client obviously, in terms of the marketing side of it, believes that the limited amount of cover they might be getting is appropriate, and because people generally believe that if they get their super ticked off, everything’s fine, there’s no additional step.
Now, I’m not necessarily saying that needs to absolutely be an advice step, but it is a concern because the clients don’t know what they don’t know, they have no idea that risk insurance generally in super will not be sufficient. It is not appropriate to hold certain insurances within superannuation. They will get an unexpected outcome; therefore they may as well not have that cover in the first place. So it’s an area that I think we’ve got to really do as much as we can to make sure that the people who are legislating understand that breaking risk into those two pieces is probably as dangerous as doing nothing.
KLIPIN: I think it brings to fore all this stuff around evidence-based policy and decision making, which was obviously the cash flow, the Rudd government and the Gillard government, don’t do anything until you know how it’s going to play out. And this insurance piece, which as John said, Bowen acknowledged at a lunch, is a key part of that.
So I’m imagining that our pragmatic new minister in Bill Shorten is going to understand that making big decisions that are going to significantly skew markets wouldn’t be in the interests of the Australian community. And I think that’s the message we’ve got to get out there.
The broader focus stuff ultimately is going to send the price of advice up, and it’s going to segment advice as a high-end market offer because, to the advisers in the room, generally people are going to deal with where their market is, where the money is, where the capacity to pay is. And the AFA has a view that the unintended consequence of all of that, whilst it may be good for the high-end high level market, is that middle and lower-income Australia are going to lose out. In terms of unintended consequences that is bad, and I think intra-fund advice might pick up some of the pieces but it’s certainly not going to pick up most of the pieces.