The Senate inquiry into the Scrutiny of Financial Advice has effectively been derailed by the Turnbull government’s decision to call a July 2 double-dissolution election. As a result, all incomplete Senate inquiries have lapsed including the Scrutiny of Financial Advice inquiry, which was scheduled to report in August.
Whatever the Senate inquiry uncovered in the 20 months since it was established in September 2014 until it was dissolved on May 9 will remain a mystery, yet the financial services industry is still in need of a radical shakeup.
For too long advisers have borne the brunt of the industry’s criticisms when in fact the ire of the regulator, media and public should be concentrated and levelled against the institutions which continue to promote a vertically-integrated model; designed to channel unknowing customers into related-party product irrespective of whether there’s a more appropriate option in the market.
Senate inquiry or not, that model must be disbanded.
Heavily restricted approved product lists, volume-based sales bonuses, shelf space fees and subsidised licensing fees – the calling card of the vertically-integrated institutions – are vestiges from the industry’s tied agency days.
They’re signs of a clandestine, outdated culture. They don’t point to a profession wholly committed to the client but rather an industry that’s gone under-regulated for too long.
Still no code of conduct
Consider the fact that the life insurance industry still doesn’t operate under a professional code of conduct, despite a plethora of government reviews into superannuation and financial advice in the past seven years. It’s a failure the senate inquiry will likely address.
Almost every other industry from financial planning to building to journalism has a code of conduct. If life insurance is to be recognised as a profession then that must be rectified immediately.
Since 2009 when the Financial Planning Association launched its Code of Professional Practice, the advice industry has moved to become more professional, more educated and more client-focused.
Australians are receiving better advice and enjoying better outcomes as a result.
The Association of Financial Advisers (AFA) also recently unveiled its Code of Conduct.
But they only cover FPA and AFA members.
There’s no compulsion on the broader life insurance industry – which includes bank employees, underwriters and claims managers – to act in the best interest of clients. Unlike financial planners, they’re not compelled to provide professional services with integrity and objectivity; disclose and manage conflicts of interest, or be fair and reasonable.
Where did it all go wrong?
The roots of the life industry’s woes run deep and date back to the late 80s and early 90s, around the time of AMP’s agency war with National Mutual.
During that tumultuous period, compulsory superannuation was introduced and a fledgling financial planning industry was borne out of a troubled life industry. There was no time to lay a right foundation to ensure the provision of objective, professional advice. Financial planning merely borrowed from the insurance industry.
Since those heady days, the life insurance industry has largely gone underinvested and under-regulated.
This is despite the fact that the old life agent model, where a district sales manager supervised 20 or so multi-agents who provided super, investment and insurance advice, has been gazumped by the much more complex dealer group model.
The problem with the dealer group model is that it’s difficult to support financially, which has forced licensees to accept, and indeed, go searching for volume bonuses and rebates from product manufacturers in order to survive. Many of the industry’s troubles stem from the proliferation of secret rebates, which feed conflicts of interest, distrust and unbiased advice.
But until now, that culture has gone unaddressed.
The Senate Inquiry was largely investigating the need for further reform and improved oversight of the life industry. It was also examining whether entities were engaging in unethical practices to avoid paying claims, and whether an industry code of conduct was required.
Industry has only itself to blame
It represents yet another missed opportunity for the regulators to enact powerful and lasting change.
While the industry likes to talk about the nation’s underinsurance problem, it only has itself to blame for the fact that Australians are among the most underinsured people in the developed world.
According to the 2010 Lifewise/NATSEM Underinsurance Report – Understanding the social and economic cost of underinsurance, only 4 per cent of Australian families have adequate levels of life and risk insurance.
It’s clear that that industry hasn’t done anywhere near enough to educate consumers and develop innovative, affordable cover.
If more people are to receive quality advice relevant to their needs and objectives, and gain adequate protection, all stakeholders must work together to build a better, stronger life insurance industry.
