FSC’s churn policy is “anti-competitive”: Synchron

The Financial Services Council’s (FSC) efforts to lead the self-regulation of the Australian life insurance industry are instead promoting collusion amongst the major players.

Director of dealer group Synchron, Don Trapnell, who sits on an Association of Financial Advisers (AFA) committee overseeing a new framework for the life insurance industry, believes the controversial “churning” policy put forward at the FSC conference last week has obscured the larger debate on overall remuneration within the life insurance industry.

“It is disgraceful that life insurance companies, via their association with the FSC, are working together to their mutual advantage, proposing a process that will financially disadvantage honest advisers for policy lapses in circumstances that are, more often then not, beyond the adviser’s control,” he says.

Trapnell claims Synchron will bring the matter to the Australian Competition and Consumer Commission (ACCC) on the grounds of anti-competitive behaviour if the FSC’s proposed clawback processes on upfront commissions see the light of day.

Clawback complaints

The FSC has proposed a clawback process in relation to upfront commissions, which would result in 100 per cent of the commission being paid back to the insurance company by the adviser if a policy lapses in the first year.

If the policy lapses in the second year, 75 per cent would be paid back and if it lapses in the third year, 50 per cent would be paid back.

“Should the FSC proposition to have a three-year responsibility period be universally adopted, Synchron will consider making a formal complaint to the ACCC for anti-competitive behavior,” says Trapnell.

Trapnell believes there is no need for self-regulation and is “quite happy with the status quo”.

However, while both the AFA and Financial Planning Association have given their qualified support to the latest life insurance remuneration framework, Trapnell says life companies will only gain his respect when they adopt processes that are designed to prevent churned cases coming towards them – as opposed to penalising advisers for lapsed cases going away from them.

“There are many reasons why policies lapse and we believe very few are as a result of churning,” he says.

“It’s a fact of life that client circumstances change and what once suited them may not suit them, three or even two years later. This is not the fault of advisers and advisers should not be penalised for it.”

Work already done

Synchron objects to the commission’s clawback provision on the grounds that the adviser has already done the work.

“What would a life company have to say if the industry introduced a policy that meant life companies had to repay to a client 75 per cent of the non-risk component of premiums received if two years down the track the policy no longer suited the client’s needs?”

Trapnell adds that in an industry where products are constantly being improved, it would be remiss of advisers not to regularly review client policies and replace them where appropriate.

“We also have serious concerns about how the FSC’s proposed policy sits next to the best interests duty,” he says.

“If a life company is fair dinkum about addressing a supposed culture of churn, then it should instruct its underwriters to call for further information where a like-for-like replacement is submitted as new business,” Trapnell says.

Counteroffer and compromise

This solution has predictably met with resistance from the large life insurance companies and Trapnell believes this is because it touches on the real issue: unrealistic lapse rates.

“This is because while it does address churning, if in fact churning is a real problem, it does nothing to help life companies with the unrealistic lapse-rate assumptions they make in their premium rating structures,” he says.

Asked if he was encouraged by the FSC’s watered-down stance given its initial consultation paper on a framework for replacement business, Trapnell dismissed the opening salvo as little more than an ambit claim – an extravagant initial demand made in expectation of an eventual counteroffer and compromise.

Further vigorous debate between all parties is expected.

Note: This story has been corrected to say that Don Trapnell sits on the Association of Financial Advisers (AFA) committee overseeing a new framework for the life insurance industry.