The Life Insurance and Advice Working Group (LIAWG) doesn’t appear to be effectively tackling the issue of conflicted remuneration that dogs life insurance advice, according to Industry Super Australia (ISA).
Simply ignoring the merits of fee-for-service life insurance compromises the overall self-regulatory approach endorsed by the LIAWG, says Robbie Campo, deputy chief executive of Industry Super Australia.
Fee cheaper than commissions
Fee-for-service life insurance premiums are more cost-effective than their commission-based equivalent, and any argument otherwise is not credible, according to Campo. She cites a 2011 study into life insurance commissions conducted by Rice Warner on behalf of ISA.
“Commissions are a very expensive way to pay for advice, because the longer you hold the product, the more you pay,” says Campo. Her comments follow on from ISA’s submission to the Life Insurance and Advice Working Group (LIAWG).
“Dismissing that option is going to really compromise the way this inquiry is viewed, given the very heavy correlation between paying commissions, poor quality advice and very poor consumer outcomes,” Campo says.
The ISA submission to the working group states: “The argument that commissions are necessary to solve the underinsurance problem can only be seen as a self-serving justification to maintain a very profitable remuneration structure.”
Citing the LIAWG interim report’s statement that “a no commission arrangement has not been actively considered in this interim report,” the ISA submission “respectfully urge[s] a reconsideration of this position.”
Alternative solutions
The submission outlines a transitionary response to phase out commissions from life insurance advice, suggesting a duration of between five and 10 years for implementation. The measures include:
– a flat or level commission approach
– ‘capping’ which sees commissions end once the cost of advice has been repaid
– ongoing strategic justification for life insurance advice
– annual ‘shadow shop’ reviews of insurance advice conducted by an industry-funded independent body.
Working group doesn’t go far enough
“The process can’t be viewed as a serious attempt to clean up the industry if it just dismisses the most obvious solution,” Campo argues.
She believes the hybrid and flat commission measures considered so far by the LIAWG only go as far as addressing the issue of churn rather than the deeper underlying problem of conflicted remuneration.
“The cultural heritage of life insurance advice is sales advice. If you’re going to be able to act in your client’s best interests and as a professional, it’s not consistent with that [if] you’re being paid by a product provider to sell their product.”
Campo suggests the working group’s approach is somewhat half-hearted, saying, “The industry hasn’t had a good track record of self-regulation. It would be great to see genuine efforts to self regulation to fix this problem”.
Last October’s Australian Security and Investment Commission review of life insurance advice, the Financial System Inquiry (FSI) and Parliamentary Joint Committee (PJC) have each identified significant problems with commission-based adviser remuneration. Both the FSI and PJC flagged the possibility of banning life insurance commissions entirely if the industry response is not deemed to go far enough in addressing concerns.
“I would agree that if self regulation is not done in an effective way that really is working towards solving the problem, rather than just rearranging the way commission payments are made, you do make it very likely there will be a more interventionist approach in the future,” Campo says.
She points to the Future of Financial Advice (FoFA) regulations’ banning of commissions on investment advice as a pertinent example, saying investment advisers had for years complained that it wouldn’t work, that Australians would avoid seeking financial advice if a fee-based approach was mandated. However, this did not happen and it has now become the accepted practice.
The ISA submission also states, “dismissing a no commission arrangement as a potential option ultimately prevents proper consideration of the one measure that can deliver long-term effective reform – a ban on all conflicted remuneration.”
