Advisers to abandon insurance in the face of independence disclosure

Treasurer Josh Frydenberg’s promise to implement Commissioner Hayne’s recommendation that advisers disclose their lack of independence could force some to reassess whether commissions-based insurance advice is worth retaining in their business.

The legislation will build on section 923A of the Corporations Act, which requires advisers to refrain from using the terms ‘independent’, ‘impartial’ or ‘unbiased’ if they receive commissions or conflicted remuneration.

If the government adopts Hayne’s recommendation 2.2 to the letter, advisers will be required to provide clients with a written statement “explaining simply and concisely why the adviser is not independent, impartial and unbiased.”

On August 19 Frydenberg delivered the Morrison government’s royal commission “Implementation Roadmap”, which included the proposal on a list of Hayne recommendations to be “consulted and introduced” by June 30, 2020.

Many advice firms qualify to call themselves independent but for insurance commissions. While content to simply refrain from using the terms in order to maintain their insurance advice arms, these practices may reconsider if it means actively explaining to clients in the initial stages of their relationship why they aren’t 100 per cent impartial.

According to Daniel Brammall, president of the Profession of Independent Financial Advisers (PIFA), advisers reconsidering insurance advice in light of the incoming legislation is “to be entirely expected”.

Brammall, whose group was until recently known as the Independent Financial Advisers Association of Australia (IFAAA), believes a lot will depend on what the new law actually looks like.

The watered-down version, he says, could simply mean a note in the FSG.

“You could imagine a line being inserted to say ‘I don’t satisfy section 923A of the Corps’ Act, and the reason why is I’ve got my person X with an insurance policy and I still get $8 a year for it’,” Brammall suggests.

Such a result would likely have little follow-on effect. Brammall, however, doesn’t think advisers will get off that lightly.

“I’d be unshakeable in my belief that [Hayne] envisioned an extra piece of disclosure, a one-pager that an adviser would have to present to the client before they provide any service,” he says. “That’s either in the lead up to the first meeting or in the meeting itself, where they’d have to say ‘this piece of paper discloses to you the fact that I am not independent and you can see these are the dot points as to the reasons why.”

Brammall says he’d prefer this version of the legislation, as it would clarify the “myth and misinformation” around independence in advice.

“Not only does the public not understand what it takes to achieve independence for an adviser, and what satisfying section 923A really means, but there is a lot of confusion amongst the financial planning fraternity,” he says.

Keeping a clean model

In the face of the proposed disclosure legislation, advice firms might look at either simply accepting the higher level of disclosure, reconfiguring to fee-based remuneration or abandoning insurance advice altogether.

According to Kris Mason, a Partner at MBS Insurance, the trend of advisers abandoning the insurance space has already started, prompted by the royal commission’s focus on compliance.

“We’re seeing a fair few come over,” Mason says. “Post royal commission, they’re sticking to fundamental financial planning and not doing the peripheral financial services.”

Advisers are increasingly wary of doing “bits and pieces” of insurance compliance, he says. Small advice firms, especially, struggle without the scale and distribution of larger firms or specialised insurance practices. “It’s a dangerous thing to do part time,” Mason adds.

He agrees that the incoming disclosure legislation could prompt more advisers to abandon insurance advice.

“A lot of them will want to get out of the insurance space to keep that clean model,” Mason says.

Mason flags joint ventures – where a firm like MBS Insurance helps set up a separate entity to handle insurance advice – as a possible alternative for advisers.

“A lot of them are already coming up and saying ‘hey, can we adopt a JV model?’,” he says.

Mason will be a panellist on a session ‘Inside the modern risk advice practice and the consumer lens’ at Professional Planner’s upcoming Risk Advice Forum in Sydney on September 24.