‘Flawed Logic’ in Calls to Ban Risk Commissions

Australia’s Association of Financial Advisers says flawed logic around calls for the removal of risk commissions underpins a number of submissions made to the critical ‘Quality of Advice Review’ currently being undertaken by Australia’s Federal Treasury.

In its most recent policy update to members, the association criticises some groups’ submissions to the Quality of Advice Review which call for a ban on risk commissions, saying these calls “…serve to reinforce the point that we still have a battle in front of us to make sure that further counterproductive reforms do not result from the QAR.”

…some of the usual activist groups have called for extreme measures such as the removal of life insurance commissions

The member update states that, disappointingly, some of the usual activist groups have called for extreme measures such as the removal of life insurance commissions and even the banning of asset-based fees. It says these groups clearly refuse to seek to understand the fact that it is often the clients who choose to pay for life insurance advice via commissions nor, it says, do they acknowledge the reality that LIF and other reforms have already resulted in a significant reduction in the level of life insurance in Australia.

It adds that these groups “…equally seem to be oblivious to the inevitable consequence that any further reduction in commissions will result in the substantial destruction of the individual-advised life insurance sector.”

…commissions create a perverse incentive for advisers to sell life insurance to people that are not suitable for their needs

While the member update does not specifically identify any organisations’ QoA Review submissions, Riskinfo in Australia notes consumer advocacy group Choice recommends removing the exception for conflicted remuneration on life risk insurance products. Its submission states risk commissions create a perverse incentive for advisers to sell life insurance to people that are not suitable for their needs.

Another submission – from Industry Super Australia – calls for commissions on the sale of life insurance to be banned. The focus in this argument from ISA relates to adviser conflict of interest when placing life insurance inside or outside the superannuation environment. Its submission states:

While commissions remain permissible for life insurance sold outside of super, there will always be a clear incentive for financial advisers to recommend retail life insurance products instead of life insurance within super. This is unacceptable and commissions should be banned to remove this conflict of interest.

The AFA says it will have more to say later on the flawed logic of arguments made in some of the QoA Review submissions.

Click here to access all the Quality of Advice Review submissions on the Australian Treasury website. See also: Many Voices, One Message – Association Joint Response.