The government is determined to resist pressure from the elements of the $60 billion life insurance industry to temper new laws banning hefty upfront commissions, it has been reported.
Financial services minister Kelly O’Dwyer told the Australian Financial Review
that draft legislation to deal with conflicted remuneration would be discussed at the October meeting of the Federal Parliament.
The changes will reduce upfront commissions, from some 120 per cent of the first year’s premium to a maximum of 60 per cent.
Advisers will be allowed to receive ongoing annual commissions of 20 per cent but will also be given a two-year “clawback” period to discourage churning. This means that if a policy lapses in its first year, the adviser will have to refund 100 per cent of the commission in the first year and 60 per cent in the second, the Australian Financial Review
O’Dwyer said the government would not succumb to pressure from the Life Insurance Consumer Group (LICG), a group of advisers who battled with Financial Services Council (FSC), one of the nation’s most powerful lobby groups, over the changes. LICG have also met with crossbench senators and Coalition backbenchers, hoping to have them back down, similar to that which occurred on superannuation, the report said.
Despite this, O'Dwyer vowed to push ahead with the reforms: "The government is very committed to these reforms. We're not watering them down."
The draft legislation, which is part of the wider reform agenda Life Insurance Framework, was before Parliament when the election was called; and must now be formally reintroduced, with changes initially set to take effect in July, the report said.
LICG seeks to convince the Association of Financial Advisers (AFA
) to withdraw its support of the Life Insurance Framework.
Mark Dunsford, head of LICG and NOW Financial Group director, claimed that the AFA
and Financial Planning Association of Australia were forced into accepting the 60 per cent limit with threats to an even lower threshold, the Australian Financial Review
"The FSC's proposals will result in alarming competitive advantage being gifted to the big banks and FSC members while hurting independent financial planning businesses and consumers," Dunsford said.
He said if brokers were not paid via commissions attached to insurance products, they would have to charge customers a service fee, which would worsen the problem with under-insurance.
John Trowbridge, a former APRA
executive who led an inquiry into life insurance, called on the government to proceed with the job, saying “The reforms are good. They don't go as far as they might but they are a very important step forward. There is a conflict of interest between advisers who receive big up-front commissions and their customers. It creates a number of perverse consequences."
Sally Loane, FSC chief executive, said the bill to reduce upfront commissions in life insurance represented the unfinished business of the Future of Financial Advice reforms.
"The life insurance remuneration reforms will significantly reduce upfront commissions which have been found to create incentives to offer advice that may not be in consumers' interests," she said.
"The proposed changes are consistent with concerns raised in the Financial System Inquiry, the landmark Trowbridge Review and the ASIC
Report 413 which found misaligned incentives were influencing the quality of life insurance advice."
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