The proposed laws have been agreed with the life industry and underpin a planned reform of the industry known as the new Life Insurance Famework (LIF).
The minister for small business and assistant treasurer, Kelly O’Dwyer, who introduced legislation into parliament on Friday, said the government was committed to better aligning the interests of financial firms and consumers by addressing conflicted remuneration arrangements.
“Currently life insurance advisers are paid high up front commissions up to 120% of the first year premium with low trailing commissions. This can provide a financial incentive to advisers to replace policies even where there is no consumer benefit,” she said.
Agreed deal
“In November last year life insurance peak bodies reached agreement on the implementation of these changes to improve the quality of advice and increase consumer confidence in the life insurance sector,” O’Dwyer said.
These new laws, which will take effect on 1 July 2016, include:
- a three-year phase-down of upfront commissions paid to advisers to a maximum of 60% from 1 July 2018, together with the introduction of a maximum rate for ongoing commissions of 20 per cent; and
- the introduction of a two year commission ‘clawback’ period, which will clawback 100% of a commission in the first year and 60 per cent of a commission in the second year should a policy lapse.
“I would like to recognise the considerable efforts, in particular by the Association of Financial Advisers, the Financial Planners Australia representing nearly 15,000 advisers, and the Financial Services Council representing life insurers, for developing an industry based response,” O’Dwyer said.
Right balance
“These changes strike the right balance between consumers of life insurance while recognising the need for business viability and industry stability.
“To ensure the reforms are implemented as efficiently and effectively as possible, the government will also consult on the regulations that will support the legislation,” she said.
The Australian Securities and Investments Commission (ASIC) will be responsible for implementing the commission caps and clawback arrangements, and will review the sector in 2018 to determine the effect of the reforms.
If significant improvements are not identified, the government said it will move to mandate level commissions.
ASIC has already taken action against one life insurer and banned several advisors in its attempt to clean-up a sector dogged by high commissions and bad advice, deputy chairman of the corporate regulator, Peter Kell, told a senate hearing on Thursday.
