The Australian federal Treasury is seeking submissions commenting on a draft bill to amend the Corporations Act 2001 that, if passed, will significantly impact the remuneration and commission arrangements in the life insurance industry. Once enacted, the bill:
- will remove the exemption from the conflicted remuneration ban on benefits paid in relation to certain life risk insurance products;
- will enable ASIC to determine the acceptable benefits payable for life insurance products; and
- will ban volume based payments in life risk products.
It is expected that if the Senate passes the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, the bill, once enacted, will have effect from 1 July 2016.
These reforms to remuneration arrangements in the life insurance industry came out of the Trowbridge review that followed an earlier review of conflicted remuneration arrangements in the life industry by ASIC.
The significant reforms in the bill include:
- Up-front commissions (that can provide an incentive for advisers to ‘churn’ policies) will be significantly scaled down. ASIC will have the power to ensure that these commissions will be reduced from the current average of 110-120% of the premium to a maximum of 60% from 1 July 2018.
- Permitted ongoing commissions will be set at a maximum of 20%.
- Commissions will be calculated on the total of the product premium, the product fee and frequency loading (the extra amounts charged to make payments on a monthly basis rather than annually).
- No caps will be placed on level commissions, or on fee-for-service arrangements as these arrangements are less likely to result in an incentive to provide inappropriate advice.
- Clawback provisions that will require an insurer to recover 100% of a commission from the financial adviser in the first year of a policy and 60% in the second year if a policy is cancelled (or the premium is reduced). “Clawback” refers to some or all of the up-front commission that the adviser will be required to pay back to the life insurer if a policy is cancelled or the premium reduced in the first two years for particular reasons.
The Government considers that the new commission structure will reduce the incentive to churn clients through products, providing a better basis for advisers to give advice that is more appropriate to consumer needs.
The Government also considers the clawback provisions will significantly reduce the incentive for advisers to unnecessarily replace policies after the expiration of the first year of the policy. However, advisers will not be required to pay back the full amount of the up-front commission earned if the policy lapses in the second year of the policy.
The Government’s stated objective of the reforms is to ensure there are strong incentives to prevent replacement of policies where there is no consumer benefit.
There is a question as to how ASIC, which will be enabled by the legislation to make regulation, will actually regulate to enforce it. Clawback requirements like these can be difficult to enforce and result in anomalous outcomes because the commission has been earned and taxed and likely to have been expended in some form.
On 7 April 2016, the Assistant Treasurer also released an exposure draft of Regulations to support these reforms. The exposure draft is subject to community consultation which closes on 28 April 2016.
The proposed Regulation supports the reforms above by:
- Temporarily allowing for stamp duty on death benefits to continue to be included in commission calculations. This is to allow industry the time to update its IT systems.
- Prescribing circumstances where clawback will not apply such as self-harm, suicide, where cancellation is because a certain age has been reached, or there is a policy cost reduction because of a reduced health risk of the insured.
- Ensuring the remuneration arrangements currently existing are grandfathered and that the new rules will only apply to new arrangements.
When the bill was introduced the Assistant Treasurer stated that ASIC will be required to review the impact of these changes in 2018. The Assistant Treasurer stated that if the ASIC review in 2018 does not identify significant improvement in product churn and the quality of advice, the Government will move to mandate level commissions.
While these reforms have been expected following the ASIC and Trowbridge reviews, they will nevertheless create significant change across the industry with the potential for many of the smaller advisers unable to compete.
ASIC’s continuing review of the disclosure arrangements should go some way to alleviating some of the red tape these advisers have been dealing with.
See the draft bill and explanatory document HERE.
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