It has also announced plans to close a loophole in its consumer protection laws to ensure that Australian financial services firms can no longer use retail clients’ money for their own purposes.
The high upfront life insurance commissions will be reduced following the passage of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 earlier this week, known locally as the LIF reforms.
Under the provisions within the bill, the rate of upfront commissions paid to advisers will be phased down to a maximum of 60%, which is about half what advisers can currently earn, while ongoing commissions will be capped at 20%.
A two-year upfront commission ‘clawback’ period will be introduced, under which all the upfront commission paid can be returned in the first year and 60% of the fee can be returned to the client in the second year if a policy lapses.
The changes take effect on 1 January 2018 and will apply equally to all life insurance advisers.
Initially the government had wanted to ban upfront commission entirely but softened its plans after discussions with the industry, a move that was acknowledged by the financial advisers.
“While most advisers understand that phased reductions in upfront remuneration from 2018 will be offset by higher ongoing remuneration, the change is still significant for many,” Brad Fox, chief executive of the Association of Financial Advisers (AFA) in Australia.
“Advisers need to work together as professional peers to learn from each other’s experiences about how to embrace different remuneration models such as hybrid and level commissions and fees,” he added. “For most advisers, transitioning successfully will bring increased practice valuations.”
The minister for revenue and financial services, Kelly O’Dwyer, said the new law had been necessary as the high upfront commissions currently being paid to advisers were found to be causing an “unacceptably high” level of poor quality life insurance advice.
A review by the industry regulator ASIC in 2014 found that in 45% of cases involving high upfront commissions, the advice provided failed to meet the legal standard.
“The changes will significantly reduce the incentive for advisors to churn clients between life insurance products where there is no consumer benefit.” O’Dwyer said.
The reforms in the new law are designed to capture all life insurance sales channels in the future, including those that may not be considered to provide financial advice.
The government also announced on Thursday that it would introduce a separate bill to strengthen protection for retail investors in the financial services sector.
The Treasury Laws Amendment Bill 2016 is one of a suite of measures the government is planning to ensure that retail consumers of financial products and services are protected in line with community expectations, according to O’Dwyer.
The minister said the proposed bill will ensure that Australian financial services firms can no longer use their retail clients’ money for their own – or other clients’ – purposes.