Conflicted remuneration: latest proposal for life insurance

The Australian federal government has continued its reform of the life insurance sector and, in particular, the current rules in relation to conflicted remuneration.

On 19 October, the Minister for Revenue and Financial Services, released for consultation revised regulations on life insurance remuneration (see HERE).

The proposed regulations are intended to improve the quality of financial advice and boost consumer confidence in the life insurance sector following ASIC’s review of various practices.

The proposed regulations support the Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2016 ( Life Act) that was introduced into Parliament on 12 October to improve the permissible remuneration arrangements relating to life insurance. Our previous article explained these reforms (see HERE)

A quick recap. The original Future of Financial Advice (FOFA) laws banned conflicted remuneration being remuneration that is likely to influence advice. However, that ban did not include remuneration relating to life insurance advice provided outside of superannuation.

The combination of the changes introduced in the Life Act and the proposed regulations will:

  • bring life insurance remuneration into conflicted remuneration that is banned;
  • cover all advisers regardless of their employment arrangements. This means the ban on conflicted remuneration will apply to both advised and direct sale of life risk insurance products;
  • introduce limits under which commissions will be permitted to be paid;
  • introduce arrangements under which there will be an obligation to repay all or part of the commissions where the policies lapse in the first two years (defined as the “clawback requirements”);
  • prescribe circumstances where the clawback provisions will not apply, such as in cases where a policy is automatically cancelled because of the person’s age;
  • provide for commencement of the reforms on 1 January 2018;
  • will remove the grandfathering and transitional provisions that are no longer required because of the revised commencement date of 1 January 2018 (including the provisions explicitly grandfathering adviser remuneration arrangements and providing a 12 month period during which stamp duties could be included in the calculation of commissions).

The draft regulations operate to ensure that benefits associated with the direct marketing or direct sale (that is, marketing or sales not involving the provision of financial product advice) will fall into the category of conflicted remuneration that is banned.

The regulations extend the range of benefits received by licensees or representatives relating to life risk insurance products that will be subject to the conflicted remuneration ban in the Life Act. These benefits will be considered to be conflicted remuneration even if the benefit could not reasonably be expected to influence the choice of financial product or the financial product advice given to a retail client.

While submissions on the draft regulations have not all been received by Treasury, it is reasonable to expect that the reforms are likely to proceed without significant change.

© Guerdon Associates 2024
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