Earlier this month the government released the long-awaited Corporations Amendment (Life Insurance Remuneration Arrangements Bill) into Parliament.
The bill is essentially a framework for how the new laws will be applied. We expect the detail will be released via corporations regulations and via Australian Securities and Investment Commission (ASIC) class order which is expected later in the year.
We expect the bill to be passed into law on July 1, 2016 – this is also known as the “commencement date”. If the bill is not passed on July 1, 2016, the commencement date will be the day after the bill receives royal assent and is passed into law.
Advisers have a range of questions about the reforms and how they may affect advice businesses.
Advisers and their businesses
These reforms are the biggest changes to the life insurance industry since 2001. The government stated that one of its objectives as part of these reforms is to ensure better outcomes for consumers. The government plans to do this by changing the way advisers are remunerated when providing life insurance recommendations.
Given most advisers currently write stepped premiums, this is going to have a massive impact on advice businesses moving forward. The rate at which upfront commissions can be paid will reduce.
If you have not done so already, now is probably a good time to sit down with your peers and see what changes you may need to make to your business model. For example, some considerations or areas of potential review will include, cost structures, your value proposition, client segmentation and key activities.
Upfront commissions
Up until now the Corporations Act broadly banned conflicted remuneration such as the payment of commissions in the financial services sector. Life insurance and policies held outside of superannuation have been largely exempted from this ban.
However, once the reforms are passed into law this will change. Advisers will still be able to receive commissions when they recommend a life risk product, but they will need to satisfy certain criteria that will be determined by ASIC. We expect more detail on this will be released soon.
The Assistant Treasurer said about the current commission model and the powers that will be given to ASIC: “ASIC will have the power to ensure that they will go from an average of 110 to 120 per cent of the premium today to a maximum of 60 per cent from 1 July 2018. Permitted ongoing commissions will be set at a maximum of 20 per cent”.
The bill also stated that the amount of commission that can be paid to an adviser would be determined on the basis of a policy cost rather than the base premium. What this means is the calculation used to determine the amount of commission can factor in things such as frequency loadings and policy fees. This is obviously a better outcome for advisers.
The ASIC criteria
The life insurance reforms propose to give ASIC certain powers known as the “ASIC instrument requirements”. The ASIC instrument requirements relate to certain types of allowable commissions and clawback arrangements.
ASIC will be granted the power to determine:
- The maximum acceptable commission percentages in the first and subsequent years of a life insurance policy (known as the “benefit ratio requirements”)
- The amount that will be clawed back over the two-year clawback period (the “clawback requirements”).
As previously stated, we expect to see more detail of these reforms soon; however, the below is what has previously been proposed in terms of transition and clawback arrangements. We expect the below figures to be confirmed shortly.
Previous proposed transition arrangements
| July 1, 2016 – June 30, 2017 |
Upfront commissions will be paid at 80% of the total premium and 20% ongoing commission |
| July 1, 2017 – June 30, 2018 |
Upfront commissions will be paid at 70% of the total premium and 20% ongoing commission |
| July 1, 2018 onward | Upfront commissions will be paid at 60% of the total premium and 20% ongoing commission |
Previous proposed clawback arrangements
| First year | 100% of the policy in the first year |
| Second year | 60% of the policy in the second year |
Clawbacks if a client goes on claim during the first two years of holding a policy
Where a client goes on claim and a policy or product is cancelled or not continued there will be no clawback. Clawback triggers are a power given to ASIC, so ultimately this is an area where we are expecting more guidance.
We expect that the regulations will provide guidance about the types of situations where an insurer will be prevented from clawing back a commission within the first two years.
Clawback if a client moves to another adviser inside of the first two years of holding a policy and the new adviser recommends a switch
At this stage it is best not to speculate until we see what is contained in the regulations.
Buying or selling a book of business – grandfathering of existing arrangements
The bill contains provisions which grandfather certain payments. These provisions are consistent with those introduced as part of the Future of Financial Advice (FoFA) laws and allow certain arrangements to continue at current commission levels.
For example, if you were looking to purchase a book of business which had some sort of volume bonus attached to it, we would expect the pre-existing arrangement to be grandfathered at the level of June 30, 2016.
Clawback if there is an automatic reduction in a policy premium, for example when a client quits smoking or reaches a predetermined age or an expiry age
Regulations may prescribe the circumstances under which the amendments do not apply to a benefit.
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Entering into an arrangement with a client before June 30, 2016 but business not lodged until July 3, 2016
Any life policy issued within three months of the commencement date will not need to meet the criteria specified by ASIC. The adviser would not be subjected to the reduced upfront commission or the proposed two-year clawback arrangement.
In other words, on June 28, 2016 you provide advice recommending a life insurance product to a client.
On July 2, 2016 the client purchases the life product and on July 3, 2016 a life product is issued to the client.
As the life product is issued within three months after the commencement date, the amendments do not apply and any benefits paid do not need to meet the criteria specified by ASIC.
New laws and making a recommendation to increase the amount of cover a client holds in an existing policy they took out in 2014
As the arrangement was entered into before the commencement date, and as the life product was issued before the commencement date, the new laws do not apply, and the benefits paid do not need to meet the criteria specified by ASIC.
Do the new laws apply to level premiums?
The new laws do no apply to level premiums. Level commissions will still be able to be paid. There will be no maximum cap on level commissions if you make a recommendation which results in a level commission being paid.
Clawback does not apply to any recommendation where the adviser is remunerated via level commission.
Is this the end of the reforms?
The government has requested ASIC undertake a review of the sector to assess whether the reforms have better aligned the interests of advisers and consumers, and whether further reforms are required. The review is to be undertaken in 2018 (2018 Review). As part of this process ASIC has been tasked with collecting information from insurers such as lapse rates to determine whether the reforms have achieved their desired objective. The government has indicated that they would consider other options, such as implementing level commissions only.
