This week was, as ASIC deputy chair Peter Kell is reported to have said, a “festival of life insurance”. A big week – a week when too much life insurance was barely enough.
It was all set up the week before when a bid by the Life Insurance Customers Group (LICG) to force constitutional changes on the Association of Financial Advisers (AFA) was quashed.
The LICG opposed the AFA’s support for the Life Insurance Framework (LIF) and wanted the constitution amended so the AFA would, in effect, have been required to change its position and oppose several of the key elements of the LIF.
That all became moot anyway less than a week later, when the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 was reintroduced to parliament.
Brad Fox, chief executive officer of the AFA, emerged from a bruising few months with leadership credentials intact to restate a valuable perspective.
“This Bill does not give our members everything that we thought was appropriate, but there are many other stakeholders that the government also needs to satisfy,” he said.
Politics was very much the art of compromise in this case, and the LIF can’t be viewed in isolation. It is part of a range of measures, both regulatory and self-regulatory, that all came together in the space of a few days this week.
Was it coincidence? If it was, it was remarkable. But it doesn’t really matter. It all had to be done, sooner or later.
It might have been tempting to conclude that advisers were the bad guys in this movie, and that if you could simply get them to clean up their act – remove conflicts and misaligned invectives – then all would be sweetness and light and consumers could exist in some kind of insurance wonderland.
But we know that the life insurance companies themselves are far from squeaky clean. The FSC code of conduct addresses some of the areas where the manufacturers must clean up their act; and ASIC’s claims handling report shows how shabby insurers’ conduct and behaviour can be when they really put their minds to it.
LIF must go on
The LIF addresses adviser remuneration issues – a very significant part of the overall reforms of the sector. The LIF emerged from the final report of the Review of Retail Life Insurance, chaired by John Trowbridge, which was published in March last year. Legislation enabling the LIF – including a revised implementation timetable – was reintroduced into parliament this week (at the time of writing it was listed on the government’s order of business for Thursday).
The LIF also addresses the perceived evil of churn, by introducing clawback provisions. Together, these two measures will radically reshape how advisers are paid for the work they do putting individuals’ insurances in place. But to ensure advisers are not placed at a disadvantage to other distribution channels, the LIF also provides that the same requirements apply to direct sales.
The FSC’s code, on the other hand, deals with industry practice. The code governs how FSC members – those that are registered life insurers – behave in their direct dealings with consumers. While the code is not binding on non-FSC members, and the trustees of superannuation funds are not FSC members, there has been a statement of intent signed by key superannuation industry bodies, including the Australian Institute of Superannuation Trustees (AIST), to ensure the effect of the code extends to cover individuals who obtain insurance cover through their superannuation fund.
Financial advisers are not required to abide by the code either, unless they choose to sign up. But as Trowbridge pointed out at the time of the code launch, advisers can act on behalf of clients in holding insurers accountable to the code.
Insurers behaving badly
Trowbridge said one of the main issues advisers had over the course of his review was how poorly insurers performed on claims handling. They were too often slow to respond to a claim and to process it, they were difficult to deal with and – as ASIC’s report into claims handling, also released this week – they simply denied an unacceptable proposition of claims received.
The regulator said there are “significant shortcomings in a number of areas of life insurance claims handling, and there is a clear need for public reporting on life insurance claims outcomes”.
The FSC claims to address the issue of claims handling – and other things – though its code by imposing minimum standards for the timeliness and communication. It is also set to embark on seeking Australian Competition and Consumer Commission (ACCC) authorisation for a set of minimum standard definitions for things such as heart attack, cancer and stroke.
The overarching objectives of the legislation, the code and ASIC’s focus on insurer behaviour is to enhance consumer protection, deal with conflicts of interest and misaligned incentives .
Post-FoFA, risk is the only area where advisers can still earn a commission. The whole thrust of the reforms is to reduce upfront commission, and to introduce a mechanism by which commission can be clawed back if a product is churned. It’s about aligning incentives with consumers’ best interest.
‘On the nose’
It’s worth noting that, many of the issues that were dealt with by various means over the past five days really only had to be dealt with at all because during the process that led to the Future of Financial Advice reforms, it was deemed a good idea to exclude life insurance.
What we’ve seen this week has been, in part, a catch-up of some five or six years’ worth of regulatory and industry progress on non-insurance issues. The pace of change outside the life insurance sphere has been rapid, so it’s understandable that to those within the sphere it has seemed break-neck. That’s the nature of playing catch-up.
Leaving life insurance out of FoFA was, in hindsight, a mistake. The industry got what it wanted at the time – that is, the retention of the status quo – but the pace of change now is the price that has to be paid for being late to move.
It was another mistake then, and it’s a mistake to continue to think that life insurance is somehow different from other financial services and that structural conflicts within the system are to be tolerated. If the years of the FoFA debate taught us anything it’s that conflicts and opacity are even more on the nose today than they were then.
A modern, progressive financial services sector can no longer obfuscate and fudge key issues. It can no longer put, nor be seen to put, the interests of anyone other than consumers first. That goes for product manufacturers at least as much as it goes for advisers.
And indeed, if parts of the sector – think financial planning – want to professionalise, then in fact they must go even further, and put the public interest above all else.
