After a difficult series of negotiations, the Association of Financial Advisers (AFA) is generally supportive of the Life Insurance Framework (the Framework) released today and endorsed by Assistant Treasurer Josh Frydenberg.
The Framework is the industry’s response to ASIC Report 413 (the ASIC Report) released in October 2014 that found unacceptable levels of retail life insurance advice that failed to meet the compliance standard expected by ASIC.
AFA CEO, Brad Fox said, “It is unfortunate that much of this debate has been about adviser remuneration, when the real issue and the thing that needed to be addressed was always the quality of advice and compliance.”
Speaking about the Framework, Mr Fox said that the final position (see attached summary) represents a compromise that, whilst challenging, is at least workable for most advisers and offers a package of measures and a transition that will see advisers, licensees and insurers sharing the responsibility for improving the outcomes from retail life insurance advice.
“This has been a very difficult eight months,” he said. “The ASIC Report created an opportunity at the outset for industry to come together and seek a solution to the issues raised without having government dictate the measures. Our intention in this process was always to find a united industry solution.”
This was made more difficult when the Murray Inquiry (Financial System Inquiry) inexplicably came up with a hasty last-minute recommendation that called for only level commissions to apply for life insurance advice.
“That recommendation, if adopted, would have seen the market for retail life insurance decimated as lower-to-middle income Australians would have been left unable to afford life insurance advice and they would not have the benefits of holding appropriate life insurance,” said Mr Fox. “The AFA wanted to move forward with a remuneration outcome based upon hybrid commissions (80/20), however it has been made clear to us that this is not something the community will now accept for the long term.”
Australians received $7.2 billion in life insurance claims in 2014 thus providing financial relief and dignity to around 100,000 families in their time of need; a record that the industry is very proud of. However, Mr Fox said there remains an enormous challenge to close the $3 trillion underinsurance gap in Australia.
“Unfortunately we have too many Australians who think the insurance they might have in their superannuation is enough if something goes wrong. It’s often not nearly enough and it usually takes a discussion with an adviser to understand what is needed and how affordable life insurance actually is. The Framework has to ensure that most Australians can continue to gain access to quality advice from a financial adviser,” he said.
“The alternative to retail life insurance is direct insurance such as that advertised on TV. Retail insurance through an adviser costs significantly less than direct products, has better policy definitions, higher rates of successful claims and lower rates of non-disclosure when compared to non-advised direct life insurance. For most Australians, buying direct insurance represents a much worse outcome.”
The package of solutions will be implemented over a three-year transition period that the AFA, together with the Financial Planning Association (FPA), worked very hard to achieve. “In representing advisers, the AFA worked collaboratively with the FPA to reach a shared blueprint of recommendations that in themselves represented fundamental change on many levels. Jointly, we pursued those outcomes in discussions with the FSC and the Minister,” Mr Fox said.
“We didn’t get everything we wanted, but it was certainly beneficial to the outcome that the AFA and FPA worked so well together on the issues. Several unworkable options were raised during the debate. Practices will still be under financial pressure to adjust, but for most the transition period is long enough to successfully redesign their advice processes and charging models. Efficiency gains will be important.”
The AFA was particularly pleased to have won the three-year transition period, clawback arrangements that taper down appropriately, retention of greater payment in year one (when the costs of providing the advice are highest), commitment from the insurers to improve efficiencies and government support for ASIC to address the cost of providing advice through more efficient and effective advice document requirements.
The AFA has pledged to provide the support advisers will need to transition to new models for providing life insurance advice. “We know that the average cost to a financial advice practice to deliver and implement quality life insurance advice is around the $3,000 mark, yet advisers will receive less than this in commission for advice provided to the average client,” Mr Fox said. “Business models will change. Efficiencies will have to be found. We will support advisers to adapt and change to operate successfully into the future. We will hold insurers and other industry stakeholders accountable to deliver the efficiency gains that are needed. The Australian public needs the support of advisers so we mustn’t allow this to create an exodus of advisers from the market.”
The AFA participated with the FSC in convening the Life Insurance and Advice Working Group (LIAWG) after the ASIC Report was released last October. In making that decision, the AFA was acutely aware that without adviser representation, the insurers could skew the agenda to dealing with their own profitability concerns without challenge.
“It has been a key concern for us to address any underlying cultural problems that have contributed to the issues raised by ASIC, particularly where inappropriate replacement of policies has been alleged,” Mr Fox said. “High upfront commissions of over 100% in the first year, together with insurer conduct that encourages the switching of clients’ policies, have created conflicts of interest. In the simplest terms, the public, consumer groups and politicians have made it clear that this must stop. These measures ensure that it will.”
The AFA has commenced working on a range of mechanisms that will support advisers to successfully transition to the new model and ensure great advice for more Australians.
SUMMARY
Retail life insurance industry proposal
Adviser and licensee remuneration
This proposal is not intended to limit the industry’s current ability to operate on a level commission or fee-for-service basis.
- Maximum total upfront commission of 60 per cent of the premium in the first year of the policy, from 1 July 2018.
- Maximum ongoing commission of 20 per cent of the premium in all subsequent years from 1 January 2016.
- Three year retention (‘clawback’) period, to commence from 1 January 2016 to apply as follows:
- in the first year of the policy, to 100 per cent of the commission on the first year’s premium;
- in the second year of the policy, to 60 per cent of the commission on the first year’s premium;
- in the third year of the policy, to 30 per cent of the commission on the first year’s premium.
- Ban on other volume-based payments from 1 July 2016, with appropriate grandfathering arrangements, consistent with the Future of Financial Advice laws.
- Life insurance companies to offer fee-for-service insurance products to support advisers who wish to operate on a fee-for-service basis.
Transitional arrangements
- Maximum total upfront commission of 80 per cent of the premium in the first year of the policy from 1 January 2016.
- Maximum total upfront commission of 70 per cent of the premium in the first year of the policy from 1 July 2017.
- Maximum total upfront commission of 60 per cent of the premium in the first year of the policy from 1 July 2018.
Quality of advice and insurer practices
- Government to consider measures to widen Approved Product Lists by 1 July 2016.
- Life Insurance Code of Conduct to be developed by the FSC by 1 July 2016. Similar to existing codes for Banking and General Insurance, the Code would set out best practice standards for insurers, including in relation to underwriting and claims management.
Better enforcement and monitoring
- Ongoing reporting by life insurance companies of policy replacement data to ASIC to commence 1 January 2016.
- Government to conduct a review of these measures by the end of 2018.
Industry efficiency
- ASIC to review Statements of Advice, with a view to making disclosure simpler and more effective.
- Government to consider developing a mechanism to rationalise life insurance legacy products, consistent with recommendation 43 of the Financial System Inquiry.
Source: Association of Financial Advisers
