Kelly O'Dwyer, the Minister for Revenue and Financial Services, defended the controversial decision to leave upfront broker commissions, adding that they would now be capped at 60%, reported the Sydney Morning Herald.
The cap is part of wider reforms into the country’s life sector, known locally as the ‘LIF reforms', and will be introduced this month before a government committee examines the sector in June next year.
At present, a broker gets an average of around 120% commission payment each time they sell a new policy.
Life insurance commissions were exempt from the future of financial advice (FOFA) reforms, introduced in 2012, when commissions for all other financial products were banned.
However, commissions in Australia’s $44 billion life industry have continued to come under fire in recent years, with brokers accused of ‘churning’, where they change client policies in order to receive large commission payments.
Cleaning up act
The country’s life insurance industry has been looking to clean up its image after a report by the Australian Securities and Investments Commission (ASIC) into the sector two years ago found 37% of advice broke the law.
The study found that 45% of advice failed when high upfront commissions were taken, compared with a 93% pass rate when other forms of commissions were taken.
Speaking at the Association of Financial Advisers conference on Wednesday, O'Dwyer said the government is taking a "more measured approach" to commissions in the sector instead of banning them outright.
"It would have been easy for the government to simply accept the recommendations of the Financial System Inquiry, and move to a level commission model. But we didn't do that," reported the Herald.
"Instead, we chose to work co-operatively with industry to develop a package of reforms that balance the need to maintain industry viability, and improve consumer outcomes."
Peter Johnston, executive director of the Association of Independently Owned Financial Professionals, criticised the government for introducing reforms before the inquiry into the sector.
"This will be a fruitless inquiry because they've already passed legislation," he told the paper.
He added that commissions should be phased out altogether over time but left higher than 60% in the short term to allow the industry to adjust.