The Australian Securities and Investments Commission’s (ASIC) report into the quality of life insurance advice has highlighted divisions between the industry’s professional and industry associations.
The regulator yesterday released its long-awaited report into the life insurance sector, which it raised as a red flag issue for financial advice in August. It found over a third of the 200 Australian Financial Services licensees surveyed (37 per cent) were non-compliant.
In response, the Financial Services Council (FSC), whose membership includes many insurance companies, along with the Association of Financial Advisers, announced plans for a working group to specifically address retail life insurance product structures and distribution practices. It would result in a report issued early in 2015.
The Financial Planning Association (FPA) declined to be involved, says Mark Rantall, chief executive of the Financial Planning Association (FPA).
“We were approached, however in this instance, we thought it was important to separate product and distribution from any advice issues,” Rantall says.
“We’ll stand ready to work with any other advice professional association…but we think the issues of product manufacturing… should be dealt with by the product manufacturers.”
Rantall referred to the “far better performance” of life insurance advisers before the implementation of the Future of Financial Advice (FoFA) legislation than after. This was one of the key findings outlined in the ASIC report.
The FPA favours addressing the issues through its own membership-mandated standards, including higher professional and education standards.
“We’re confident that we have the right practice standards embedded in our code to deal with these issues,” Rantall adds.
“But again, we’ve separated ourselves as a professional association rather than an industry association.
Upfront commissions are problematic
Stopping short of recommending the removal of commission-based remuneration for life insurance advice, premium structures and commission models were key problems identified in the ASIC report.
“ASIC’s message to the industry is clear: the industry needs to ensure that remuneration and incentive structures don’t undermine good quality compliant advice,” Peter Kell, ASIC deputy chairman, told a media briefing in Sydney yesterday.
“We found a positive correlation between high upfront commissions and non-compliant advice.”
Of the 202 licensee files in ASIC’s sample, it found the pass rate was 55 per cent with a 45 per cent fail rate where the adviser was paid under an upfront commission model.
Where the adviser was paid under another commission structure, the pass rate was 93 per cent with a 7 per cent fail rate.
Spanning a mix of bank- and non-aligned licensees of various sizes, advisers from nine AFS licensees – with a total of 79 advisers – were found to be non-compliant.
Kell declined to elaborate on any enforcement action taken in these cases.
“We saw too many instances where the adviser did not consider the needs of the client. Where consumers were recommended policies they could not afford
High rates of churning clients
Churning of clients between different life insurance policies with little or no benefit was a main issue identified.
“We saw too many instances where [clients] were switched to another policy without good reason. The life insurance industry is now on notice to increase standards and deliver better quality advice on a more consistent basis.”
“We’re not pushing for a particular commission model…the ball is really in the industry’s court as to how they address that,” Kell said.
He suggested the distinction between stepped and level premiums could be something worth considering. “That’s certainly an option that I think the industry needs to think about,” Kell said.
He also flagged greater ASIC enforcement action following from the report.
“We will do more of this if that’s what is required to send the message through [to the industry] that standards need to be lifted.”
