In significant news from across the Tasman, the Australian Treasury’s Quality of Advice Review process has released its recommendation that life insurance commissions should be retained, but with their currently-capped restrictions remaining…
This proposal is contained in a 12-page snapshot document released by the Treasury, comprising a summary of the data the Review has considered in relation to conflicted remuneration in both general and life insurance and the proposals stemming from its consideration of that data, which includes ASIC’s review of life insurance advice files.
The proposal
The proposal recommends retention of the existing conflicted remuneration exemption for benefits given in respect to life risk insurance products. While not explicitly stating the existing 60/20 commission caps under the Life Insurance Framework reforms should be retained, the current caps are referenced by Review leader, Michelle Levy, as being a part of existing requirements and – by implication – her recommendation appears to be that the 60/20 caps should continue.
While Levy proposes to retain risk commissions, her recommendation requires advisers to obtain their client’s informed consent, in writing, to receive a commission. She proposes that, in order for the consumer to be able to make an informed decision, the adviser must disclose details of:
- The commission the adviser will receive for the duration of the policy (eg any upfront and trailing benefits)
- The nature of the ongoing service that the adviser will provide to the client in relation to the life risk insurance product (eg assisting the client pursue and settle claims)
Outlining her reason for requiring client consent, Levy notes that if an adviser will receive a benefit for the sale of a life risk insurance product they recommend to their client, “…they should have an obligation to tell the client about the benefit and the client should have the opportunity to consent (or not) to the provision of that benefit.”
Levy acknowledges that disclosure and consent are not always – and perhaps not even often – effective consumer protection tools. “Nevertheless,” she states, “…a client should be put in a position to understand and consent (should they choose) to their adviser receiving a benefit from the product issuer.”
The data – ASIC life insurance advice file review
The snapshot document outlines the data informing the Review’s recommendations, including the outcome of ASIC’s review of life insurance advice files, in which it compared 521 files from 2017 (before the LIF reforms were introduced) with 522 files from 2021 (after the full implementation of the LIF reforms).
In noting these advice files were assessed for compliance with the best interest duty and related obligations under the Corporations Act 2001 to determine whether there were significant concerns about client detriment/harm arising from non-compliant advice, ASIC’s file reviews found:
- Compliance with the best interests duty and related obligations had improved, with the pass rate increasing from 37 per cent of assessed files in 2017 to 58 per cent in 2021
- There was a reduction in the number of files for which there was a significant concern about client detriment/harm from 12 per cent in 2017 to 7 per cent in 2021
- The proportion of advice files with indicators of churn reduced between 2017 and 2021
- The sample of advice files assessed were dominated by commission-based advice, with more than 90 per cent of the assessed files in both 2017 and 2021 involving the payment of a commission in connection with the sale of a life insurance product (as compared to clients being charged an advice fee)
While the data shows that the quality of advice has improved between 2017 and 2021, the report states it is difficult to conclude that the improvement was because of the LIF reforms. It says “This improvement could also be attributed to a number of other factors, such as the implementation of the professional standards, which introduced education and training standards for financial advisers.”
It added that the data also indicated an increase in the age and wealth of clients that received life insurance advice, and that this might indicate that lower commissions have encouraged advisers to prefer to provide advice to those with higher sums insured and higher premiums.
Click here to access the Australian Treasury’s key findings on general and life insurance as part of the Quality of Advice Review, which contains additional data and subsequent rationale that underpins the recommendations it has released.