ROUNDTABLE: The real risk in FoFA

DE GORI: Yeah, that’s a good point. I don’t think intra-fund is the solution there. We need to hold the government accountable within the FOFA reforms about looking at the way in which they can scale back the barriers in terms of allowing advice to be more affordable and accessible. So as part of this review, there’s talk about extending the intra-fund advice model in terms of allowing further advice to be provided, which we don’t really agree with. They’re not intra-fund advice appropriate.

But there is a risk, as Richard mentioned, that if we don’t do something about the fact that advice will become more expensive then there’s going to be a great chunk of middle Australia that just won’t get the advice because they need more than intra-fund, but they can’t afford the full-scale advice.

DI CRISTOFORO: The other elephant in the room is opt-in, of course, because you apply the opt-in provision over the top of any recommendation here, you’re effectively taking the slice that currently we’re concerned about and making it even less accessible, and people will self-select. And we’re trying to run a business. You know, what service is being provided and to what scope can you actually deal with both the risk management and wealth management needs of your clients?

COOK: Yeah, talking about the theme of opt-in, from what I remember when I read Cooper, they’re also talking about the watering down sort of default insurance. You were talking about a two-step process, the second step being what insurance do you hold outside of superannuation? I think even the people from the Left, like Bill Shorten, should be thinking about what default cover they’ve put in place for, you know, a 25-year-old who hasn’t thought much about insurance and might have a $300,000 mortgage, or whatever, with his new wife, and might earn $50,000 or $60,000 a year, and his base level of cover under his industry super fund is just completely inadequate.

BROWNE: Could I just say how refreshing it is to hear that we’re talking about FOFA and we’ve got the heads of some of the most significant industry representative groups sitting at the table, and there is agreement. And I just think that we should take a message from this. We agree, sitting around the table, that under-insurance is real. We agree that the economic and social cost of under-insurance is something that should trouble the government, because we look at it rationally and we believe that the $10.9 billion that the government spent last year on disability support pensions will increase in the event that commissions are banned. And what a great opportunity this presents for us all to come together around a central theme that’s in the interests of all Australians, to gather all of our research, gather all of our thinking and as an insurer, some of our experiences, to create a message, and a very clear message for government.

It strikes me that in a lot of the press there’s been pictures portrayed of division, however this is the central issue, the issue that we’ve just covered off. And I’d like there to be an opportunity for us all to come together and share that information and come up with that one clear, central message because right now we need that and it’s ‑‑‑ I’m sure all advisers out there in Australia would be happy to hear such uniform support of something that’s at the heart of the key issues.

HOYLE: If we agree that under-insurance is an issue, and that the cost for the government of under-insurance is an issue, it follows then that the ability of advisers to provide advice and to sell risk products efficiently and profitably is also critical. That’s how it’s got to be done. So you look at the proposals in FOFA, and the one in particular about abolishing commission and you say, “Right, first of all, what conflict in the insurance business are they looking to abolish by getting rid of commissions? Where does the conflict happen?” – because they’re talking about conflicting remunerations being the thing they have to get rid of. What conflict in the risk business are they supposedly addressing?

And secondly, how would it affect the economics of an advice business? How would you have to respond if commission were to be outlawed?

DE GORI: That’s a great point about in terms of what would they be achieving if they get rid of commissions? What are they actually trying to achieve and will they achieve it? Because it’s our experience that there is no real evidence of mis-selling in terms of insurance.

I mean there is the question of churning, the perceived nature of churning because of the commission structure. Again, there is very little evidence of that and I think a lot of the product manufacturers have done a great lot of work in terms of trying to stop that, in terms of dealing with those advisers that are known to be churning. And I think that there is that perception, however.

The FPA’s position, of course, is to continue to support commissions under insurance and the reason for that is because there is no obvious mis-selling, and also there are a lot of risks by removing commissions.

And one of those real risks for me is that is the value that risk advisers provide through the whole process, not only from the application stage, all the way through to the claims stage. I mean, that the commissions that are provided to risk advisers support that whole function from end to end. And then if you start removing that and charging clients in order to have all those different services provided you may run the risk of obviously not having people actually provide the claim support at the end, increasing the claims, increasing disputes.

And also the fact that people won’t get insurance cover in the first place.