The Quality of Advice Review’s proposals on conflicted remuneration present a conflict of its own.
The review’s proposals on life insurance remuneration explicitly acknowledge there is a potential conflict where an adviser receives “benefits which are reasonably likely to influence financial product advice” but goes on to argue that they should be retained subject to disclosure and consent by the client.
However, Standard 3 of the industry code of ethics is also clear that an adviser must not act if he or she faces a conflict of interest. On the face of it, the advice review proposal on life insurance remuneration conflicts with an adviser’s ethical obligations.
The paper’s author and lead of the review, Michelle Levy, notes that in the sale of life insurance there are “currently benefits which would otherwise be conflicted remuneration because they are reasonably likely to influence the financial product advice given to a retail client by an AFS licensee or its representative which are not prohibited”.
Her consultation with the industry has convinced her that some of these conflicts ought to be retained, and that the mechanism to mitigate consumer detriment is disclosure and consent.
The main proposals paper released in August suggests the Code of Ethics and other professional standards should do more of the heavy lifting in protecting consumers to ensure the delivery of “good” advice (whatever that is).
“I acknowledge that these benefits create a conflict for the adviser (or other recipient) and that this conflict creates a real risk that the quality of the advice provided by the adviser is not as good as it would be if they were paid a fee by the client for their advice,” Levy said in the life insurance proposals paper.
It seems that advice not involving life insurance has a better chance of meeting Levy’s definition of “good” advice than does advice involving life insurance. That’s an odd outcome, to say the least.
Here’s the conundrum – some forms of conflicted remuneration are to be regarded as OK, provided the consumer is apprised of the conflict and required to give consent. There will be greater reliance on the code to protect consumers – except that a key element of the code is that advisers cannot act if there is a conflict of interest of precisely the type Levy says should remain.
One of these positions must prevail, which means either the proposal is dead on arrival, or Standard 3 of the code needs to be rewritten. Rewriting Standard 3 raises the potential risk of other forms of conflicted remuneration may find their way through.
Either conflicted remuneration is bad and should be banned or it is not. Can it be bad (and banned) in some circumstances, but not bad (and not banned) in others? That’s what the QAR’s latest proposals seems to be suggesting.
Simon, you appear to be making the assumption that all regulations are just, fair and well thought out.
Nothing could be further from the truth.
Every single day, we see examples of Laws and Regulations that have shortcomings, and you only need to read any newspaper, watch any news or current affairs programs and even look at the greatest theatres in the world, (The Courts and the Judicial system) to see that you could drive a bus through most of them.
What Simon has spelt out, though it may need some tweaking, is that conflicts of interest in Investment Advice, where commissions are banned, has merit.
What he forgets to mention, is that Life Insurance Advice and the Products that MUST be merged with that advice for it to have an inherent value, is a TOTALLY DIFFERENT Business model to Investment Advice.
This is the crux of the matter and all the debating, hand wringing, discourse and Regulatory mumbo jumbo will NEVER change that basic fact.
Therefore, in order for all parties to be satisfied, why not do the blindingly obvious and something I have pushed for over a decade.
Let us separate Life Insurance risk advice from Investment advice, let them have their own Education and Regulatory requirements and be done with it, so we can get on and do what needs to be done and allow Australia and Australians to grow without the anchor that has been dragging us all backwards.
I don’t think this has to be a black, or white, consideration. Insurance is hard to sell as it is human nature to expect “it won’t happen to me”. Accordingly, a commission-based rem arrangement is likely to be the best way to fund the advice. The conflict of interest is if; there are different commissions paid due to (volume/incentive) deals, the product is switched in a short period of time, or an adviser doesn’t have a comprehensive product APL.
The structuring that allows conflicts are the issue, not simply the commissions. It would seem that the law could put in guard rails to minimise the impact or availability of these conflicts. Why not make the ability to switch a product with a stated period of time only available for a defined reason? Sure product providers are always looking at enhancements but unless those changes are likely to be significant to an individual, the new features policy shouldn’t be a standard reason for a switch within the first X years, for example. Commission harmonisation could take that conflict out of the distribution chain. If an adviser was to receive the same commission regardless of the brand on the product, hopefully the product that best needs the client’s needs is the one selected for the recommendation. Given the regulation that oversees the risk industry, what can be done to limit the impact of AFSL risk mitigation via small APLs?
Risk advice is an area where Fintech could really assist. It is an administrative intense advice area that needs some tech enablement to garner efficiencies. An application to capture the data required for the needs analysis could have the potential to reduce the investigation stage required before the advice can be formulated.
Insurance is a complex area and I support it being a specialised advice area and not something that is done in a generalist advice proposition. More broadly, could the needs analysis be separated from the product selection, not unlike the different skill sets that are required for asset allocation and portfolio construction.
Too much of the debate in financial services is around what has been the result of an industry that hasn’t had a code of ethics. We have now, it doesn’t need changing or fixing, it needs embracing and for people to put an ethical mindset into everything they do. This starts with self-awareness in order to understand and manage the many biases that are a part of the human condition.
This conversation needs to move on. Comission is a payment structure and with the LIF changes engenders no conflict. Insurers all have capped entry point commissions and capped service fees. There is no advantage in the use of one product over another in regards to revenue to the advisers. The comparison is now the design of the products, the service and claims experience.
Advisers can choose to charge additional fees if they have a service that justifies it.
Any number of client surveys have shown that clients generally are comfortable with this structure and similar to general insurance, Mortage commissions and real estate fees they are not willing to pay for services that do achieve a result. If you can’t place their insurance they do not want to pay for the effort that goes into providing and reseraching the advice.