25 June 2015
Media Release - #2015032, 2015

Industry reform proposal on retail life insurance welcomed

The Government welcomes the significant reform package received today from the Association of Financial Advisers (AFA), Financial Planning Association of Australia (FPA) and Financial Services Council (FSC) on behalf of the retail life insurance industry.

Having previously expressed my preference for industry to develop genuine solutions to the problems identified in the Australian Securities and Investments Commission’s (ASIC) Report 413 Review of Retail Life Insurance Advice (2014) rather than for the Government to act unilaterally, I welcome industry’s response.

These proposals are intended to produce significant benefits for consumers. This will be achieved through improved quality of advice as a result of a better alignment of interests, more product choice and enhanced competition. The proposals have the potential to be the most significant reforms to the retail life insurance sector since the Wallis Inquiry recommendations were implemented in 2001.

The life insurance sector is vital for our community. Life insurance advisers and product manufacturers help to provide essential financial security to Australians. 

However, recent inquiries have shown that there is a clear need for reform in the sector. 

ASIC’s Report found unacceptable levels of poor quality advice, and a strong correlation between high upfront commissions and poor consumer outcomes.

Following ASIC’s report, an industry-commissioned review, chaired by John Trowbridge, recommended several measures designed to improve consumer outcomes, including a significant modification to the upfront commission model. 

Further, the Financial System Inquiry, commissioned by the Government and chaired by David Murray, recommended a level commission structure – so that any upfront commission does not exceed ongoing commissions.

While the Corporations Act 2001 broadly bans conflicted remuneration in the financial services sector, life insurance has been largely exempted from this ban.

Industry proposals

Industry has put forward a comprehensive reform package.

A key component of this package is the abolition of the current high upfront commission structure. Under industry proposals, the maximum total upfront commission would fall by more than half the current industry maximum over a transition period to July 2018.

The package also presents a number of measures which together are designed to:

  • address incentives for poor quality advice;
  • address conflicts of interest, including conflicted remuneration;
  • strengthen monitoring and enforcement;
  • increase transparency; and
  • encourage industry innovation and efficiency.

An outline of industry’s proposal is attached.

The Government acknowledges industry’s support for a government review of the implementation of these arrangements by the end of 2018.  A proper review mechanism would be an essential component of any industry-led reform.

The Government believes that consumer interests will be best served by a competitive life insurance sector which incentivises innovation, delivers consumer-focused products, and includes both small and large participants.  In this respect, the Government recognises the importance of transitional arrangements, particularly for small business.

Next steps

Industry has proposed to work with the Government to implement these reforms.

The Government will consider industry’s proposals in the context of its response to the Financial System Inquiry.

Should these reforms proceed, the Government will ensure that there is appropriate monitoring of consumer outcomes – including the impact of the reforms on the cost of premiums.

I thank the AFA, FPA and FSC for their collaborative and professional approach.  I also acknowledge the important contribution of John Trowbridge, noting that many of the initiatives put forward by industry are drawn from his report.

Attachment: Industry proposals

Retail life insurance industry proposal

Adviser and licensee remuneration

This proposal is not intended to limit the industry’s current ability to operate on a level commission or fee-for-service basis.

  1. Maximum total upfront commission of 60 per cent of the premium in the first year of the policy, from 1 July 2018.
  2. Maximum ongoing commission of 20 per cent of the premium in all subsequent years from 1 January 2016.
  3. Three year retention (‘clawback’) period, to commence from 1 January 2016 to apply as follows:
    • in the first year of the policy, to 100 per cent of the commission on the first year’s premium;
    • in the second year of the policy, to 60 per cent of the commission on the first year’s premium;
    • in the third year of the policy, to 30 per cent of the commission on the first year’s premium.
  4. Ban on other volume-based payments from 1 July 2016, with appropriate grandfathering arrangements, consistent with the Future of Financial Advice
  5. 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

  1. Maximum total upfront commission of 80 per cent of the premium in the first year of the policy from 1 January 2016.
  2. Maximum total upfront commission of 70 per cent of the premium in the first year of the policy from 1 July 2017.
  3. 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

  1. Government to consider measures to widen Approved Product Lists by 1 July 2016.
  2. 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.

Better enforcement and monitoring

  1. Ongoing reporting by life insurance companies of policy replacement data to ASIC to commence 1 January 2016.
  2. Government to conduct a review of these measures by the end of 2018.

Industry efficiency

  1. ASIC to review Statements of Advice, with a view to making disclosure simpler and more effective.
  2. Government to consider developing a mechanism to rationalise life insurance legacy products, consistent with recommendation 43 of the Financial System Inquiry.