It is time for a return to common-sense and transparency in the life insurance debate – a debate which has inexplicably moved away from the fundamental fact that life insurance advisers play a significant role in protecting the livelihoods of millions of Australians.
In the same year that $7.2 billion was paid out in life insurance claims, the Association of Financial Advisers (AFA) agreed to participate in the Life Insurance and Advice Working Group (LIAWG) in the hope that as an industry we could work together to improve the quality of life insurance advice. We believed in the LIAWG Terms of Reference which were to find a unified solution that the whole industry could support. It is a great disappointment that this was not achieved, and that the terms of reference were not delivered. The AFA is certainly open to change and we stated at the commencement of the LIAWG process that we believe the industry needs to move away from high upfront commissions (exceeding 100% of the premium) which were identified by ASIC as being correlated to non-compliant advice.
The remuneration recommendations in the Financial System Inquiry (FSI) and the Trowbridge Report are unworkable, impractical and do not acknowledge the value life insurance advisers provide to consumers. For this market to be sustainable and for consumers to continue to access quality advice there must be a sensible balance between the interests of all parties. The proposals put forward are based on unsupported assumptions and inadequate research. There has been no independent assessment of the potential implications on consumers, financial advisers and licensees.
The ASIC Report on Life Insurance (the ASIC Report) provided an answer on adviser remuneration, which should have meant that remuneration was the easiest part of this exercise to solve. The ASIC Report demonstrated that the quality of advice delivered on a ‘hybrid’ (reduced up-front commission) basis achieved an acceptable pass rate of 93% and could safely be adopted.
With this solution, the job should have been to focus upon the other, very important, levers to improve the quality of advice – for example, training and education, codes of conduct, strategic life insurance advice, improved client engagement and advice documentation. In reality and unfortunately, the focus has been almost entirely on adviser remuneration at the expense of these other levers.
Both the Trowbridge and FSI reports have put forward a view that advisers should earn less than the actual cost of providing the advice. Advisers working in small business practices provide the majority of life insurance advice – no business of any size can survive if they earn less than they pay in costs.
The Trowbridge Report aims to justify this position, by stating that it would be, “eliminating any behavioural doubt as to whether the client’s interests are being placed ahead of the adviser’s own interests”. The Best Interests Duty and the obligation to prioritise the interests of the client, which came into force on 1 July 2013, both provide the necessary safeguards against adviser self-interest.
Inadequate remuneration for financial advisers would lead to advisers exiting the marketplace and leaving clients without access to advice on their insurance needs. As advised life insurance is so much better than other forms of insurance – in terms of cost, product coverage, claims payments and tailoring to an individual’s needs – it is critical that any change does not result in a reduction in access to advice.
An initial commission payment provides an optional method for the client to pay for their financial advice out of future premiums. This is absolutely in the best interests of consumers who need insurance, as many typically don’t have the capacity, or the desire, to pay for the full cost of advice at the time it is provided. The removal of commissions would result in the initial cost of advice and insurance cover increasing significantly for consumers, which would result in a reduction in the level of insurance.
With the FSC submission to Trowbridge calling for such a significant change to adviser remuneration, the time has come to ensure that the life insurers are transparent about their case for this significant change, including publishing modelling as to the effects on consumers, advisers, licensees and life insurers. We have released our submission and call on all other stakeholders to do the same.
The AFA remains committed to a unified industry response that addresses the concerns raised in the ASIC Review.
