Today, I am pleased to announce that industry has come together to reach consensus on the implementation of important improvements to the remuneration arrangements in the life insurance advice sector.
As announced in the Government's response to the Financial System Inquiry (FSI), we are committed to better aligning the interests of financial firms and consumers.
The Government appreciates the efforts of the Association of Financial Advisers (AFA), the Financial Planning Association (FPA) and the Financial Services Council (FSC) in constructing this reform package on behalf of the life insurance industry. This package reflects the hard work of the industry over the past few weeks finalising implementation details.
The final industry package will commence on 1 July 2016 and will apply to personal and general advice, which includes direct sales channels. Key elements of the reform package include:
- phasing down upfront commissions to a maximum of 80 per cent from 1 July 2016; 70 per cent from 1 July 2017 and then 60 per cent from 1 July 2018, together with a maximum 20 per cent ongoing commission; and
- introducing a two year retention ('clawback') period as follows:
- in the first year of the policy, to 100 per cent of the commission on the first year's premium; and
- in the second year of the policy, to 60 per cent of the commission on the first year's premium.
The final industry package includes this three year phased transition to ensure that advisers have time to adjust their business models to the reforms. The Government has responded to industry concerns about ongoing business viability by moving from a three to a two year clawback period. However, through these reforms we are ensuring that there are strong incentives to prevent replacement of policies where there is no consumer benefit.
The Government previously announced that ASIC will undertake a review of the reforms in 2018. If the 2018 review does not identify significant improvement, the Government will move to mandate level commissions, as was recommended by the Murray Inquiry. We will ensure that the industry develops appropriate lapse reporting data to provide clear evidence for this review and that ASIC works with industry to ensure strong integrity around the data. I will shortly write to ASIC requesting that they undertake this review.
In addition, I also intend to strengthen remuneration disclosure as part of a broader review by ASIC of life insurance Statements of Advice, including prominent upfront statements about commissions. The ASIC review of Statements of Advice will commence in the second half of 2016, with a view to making disclosure simpler and more effective for consumers as well as assisting advisers to make better use of these documents.
Implementing these reforms, which will commence on 1 July 2016, will be a joint effort between industry, ASIC and the Government.
The Government will amend the Corporations Act 2001 (Corporations Act) to give ASIC the power to create a legislative instrument to set caps on commissions and implement clawback arrangements. Ultimately, the final form of ASIC's instrument will be a matter for ASIC, as the independent regulator.
The Government will ban other volume based payments and grandfather existing arrangements in a manner broadly consistent with FOFA by making amendments to the Corporations Act.
The FSC will have responsibility for creating the Life Insurance Code of Practice. Similar to existing codes for Banking and General Insurance, the Code would set out best practice standards for insurers, including in relation to underwriting and claims management. This work is already underway.
Industry will also have responsibility for widening Approved Product Lists through the development of a new industry standard.
The Government is developing draft legislation for consultation by the end of 2015, and legislation will be introduced in early 2016. ASIC will commence consultation on the draft legislative instrument on a similar timeframe.
Note: Details of the retail life insurance industry reforms are below.
Retail life insurance industry reforms
Adviser and licensee remuneration in relation to personal and general advice
No changes will be made that affect industry's ability to operate on a level commission or fee-for-service basis
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- Maximum total upfront commission of 60 per cent of the premium1 in the first year of the policy, from 1 July 2018.
- Maximum ongoing commission of 20 per cent of the premium in all subsequent years from 1 July 2016.
- Two year retention ('clawback') period, to commence from 1 July 2016 to apply as follows:
3.1. when a policy lapses or the premium decreases in the first year of the policy, to 100 per cent of the commission on the first year's premium2; and
3.2. when a policy lapses or the premium decreases in the second year of the policy, to 60 per cent of the commission on the first year's premium.
- Ban on other volume-based payments from 1 July 2016, with appropriate grandfathering arrangements, consistent with the Future of Financial Advice laws.
- Life insurance companies to offer fee-for-service insurance products to support advisers who wish to operate on a fee-for-service basis.
Transitional arrangements
- Maximum total upfront commission of 80 per cent of the premium in the first year of the policy from 1 July 2016.
- Maximum total upfront commission of 70 per cent of the premium in the first year of the policy from 1 July 2017.
- Maximum total upfront commission of 60 per cent of the premium in the first year of the policy from 1 July 2018.
Quality of advice and insurer practices
- Life Insurance Code of Conduct to be developed by the FSC by 1 July 2016. Similar to existing codes for Banking and General Insurance, the Code would set out best practice standards for insurers, including in relation to underwriting and claims management.
- Industry will have responsibility for widening Approved Product Lists through the development of a new industry standard. It is envisaged that this industry standard will be a joint effort of all industry participants, led by the FSC.
Better enforcement and monitoring
- Ongoing reporting by life insurance companies of policy replacement data to ASIC to commence from 1 July 2016.
- ASIC to complete a review of the impact of the life insurance reforms by the end of 2018.
Industry efficiency
- ASIC to commence a review of Statements of Advice from the second half of 2016, with a view to making disclosure simpler and more effective for consumers as well as assisting advisers to make better use of these documents. The review of Statements of Advice will also consider whether the disclosure of adviser remuneration could be more effective, including prominent upfront disclosure of commissions.
- The Government will amend the Corporations Act 2001 in order to facilitate the rationalisation of legacy products in the life insurance and managed investment sectors, with further analysis of the taxation implications explored in the context of the Government's Taxation White Paper process.
1 The premium on which the commission caps are calculated can include the base premium, frequency loading and the policy fee but cannot include stamp duty. The commission cap is exclusive of GST.
2 The only exclusions to the definition of lapse will be when a claim is made or suicide/self-harm.