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Client Update: Conflicted remuneration and life insurance

20 October 2016

In brief: Exposure draft life insurance regulations were released yesterday. They are a marked departure from the existing conflicted remuneration provisions. Now, a benefit can only be conflicted remuneration if it could reasonably be expected to influence financial product advice. These regulations will create a new class of conflicted remuneration for life risk insurance products that does not depend on the benefit being expected to exert the relevant influence. This will apply 'in addition' to the existing definition of conflicted remuneration. Partner Michelle Levy (view CV), Senior Regulatory Counsel Michael Mathieson (view CV) and Managing Associate Simun Soljo (view CV) look at the draft regulations.

An expanded definition of conflicted remuneration

As a practical matter, the new definition is probably not intended to expand significantly the benefits that would otherwise be conflicted remuneration, but it will make it much easier to demonstrate that a benefit is banned.  

The draft regulations say that a benefit is conflicted remuneration if it is given to an Australian financial services licensee or its representative in relation to:

  • a dealing in a life insurance product with a retail client;
  • financial product advice provided to a retail client in relation to a life insurance product; or
  • information given to a retail client in relation to a life insurance product.

In short, the payment or other benefit does not have to be shown to exert any influence over the licensee or its representative. It would be enough that there is a payment to a licensee or its representative 'in relation to' life insurance. That expression is broad and pretty rubbery, but a lot will now turn on what 'in relation to' means. 

The benefit does not have to be volume-based (although if it is, the presumption that volume-based benefits are conflicted remuneration will apply). This means that the salary paid by a licensee to their employee who, say, processes applications for life insurance (this may well be a 'dealing') could be conflicted remuneration under this regulation.  

The exceptions will still apply, and the new exceptions for life insurance commissions paid on life insurance products other than group life insurance within superannuation and any life insurance for MySuper members do mean that commissions can continue to be paid within the caps, but those exceptions only apply to a benefit given to a licensee or representative who provides financial product advice. Presumably this is an oversight that will be fixed before the regulations are made.

More exceptions from the commission clawback rules

The draft regulations will also provide some relief from the commission clawback provisions in the Act, for example where a policy is cancelled because the insured dies. They will also provide a minor extension of the grandfathering concession, so it covers a situation where a new policy is issued on the exercise of an option under an existing policy and where a new policy is issued because an existing policy is cancelled due to an administrative error.

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