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Unravelled: Conflicted remuneration, dreaming and the law of common sense

5 February 2016

Written by Senior Regulatory Counsel Michael Mathieson

How many times have you heard someone say 'FoFA is settled'. Next time you hear that, you should reach for one of the many quotable quotes from The Castle and 'tell 'em they're dreamin'.

First, there are the so-called 'Retail life insurance industry reforms'. Then, get ready for remuneration reforms in the mortgage broking industry. After that will come remuneration reforms in the stockbroking industry. And APRA recently set up a taskforce to examine the remuneration of banking executives.

And passions are running as high as ever. An example: last August I wrote a piece which gently queried whether broadening approved product lists would achieve anything. To my surprise, a CEO of a financial institution took the time to come and see me and give me a ticking off about it.

So today I plan to stand on slightly less contentious ground, by taking a closer look at some aspects of the exposure draft of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2015. Consultation on the Bill closed on 4 January and we are now waiting for the outcomes and the Government's response.

Life insurance remuneration arrangements

I provided some background to the Bill, and an overview of it, last December.

To recap, the exception to conflicted remuneration for life risk insurance products applies where:

  • the life policy is outside superannuation; or
  • the life policy is within superannuation but is an individual policy for a choice member.

The proposal is to narrow that exception so that, in order for a benefit to fall within it, either of two new conditions would need to be satisfied:

  • the benefit would need to be a level benefit; or
  • the benefit would need to satisfy premium-based caps and clawback requirements set by ASIC.

The way in which these conditions have been expressed in the Bill borders on gobbledygook:

(A) the ratio between the benefit and the relevant amount payable for the product or products, or that part of the relevant amount payable for the product or products to which the benefit relates, is the same for the year in which the product or products are issued as it is for each year in which the product or products are renewed [this is the 'level benefit' condition]; or
(B) the benefit ratio requirements and clawback requirements in section 963BA are satisfied in relation to the benefit;

My first point is this – while the first condition (concerning 'level benefits') could be satisfied in respect of a group life policy, the second condition (concerning 'hybrid benefits') could not. It is impossible to tell whether this was intentional or an oversight. At the moment, commissions on group life policies taken out by, for example, an employer on the lives of its employees, fall outside conflicted remuneration. If the Bill was enacted in its current terms, commissions on group life policies of those kinds (ie outside superannuation) could only be paid on a level benefit basis. Given the absence of anything in the draft explanatory memorandum to indicate an intention to exclude these policies from the possibility of being paid on a hybrid benefit basis, it seems more likely to be an oversight.

I now turn to the 'relevant amount' for a life risk insurance product (or products), which is relevant to the level benefit condition and also to the hybrid benefit condition. The term would be defined to mean, for a period, the sum of:

  • the premiums payable for the product, or products, for that period;
  • any fees payable for the issue of the product, or products, for that period;
  • any additional fees payable because the premium for the product, or products, is paid periodically rather than in a lump sum; and
  • any other prescribed amount,

but it would not include any taxes imposed in respect of the product, or products.

Phew!

My second point is this – the definition of 'relevant amount' needs more work. Specifically, it needs to be tightened up. For one thing, the definition should specify who is paying these amounts and who is receiving them. On a literal reading of the second point above, the amount of the commission should be counted in working out the relevant amount, which is the very benchmark against which the commission is to be regulated! For another, it is not clear how taxes that are recovered by the insurer in setting the premium are to be treated – are they added under the first point above but then subtracted again under the concluding words?

Conclusion

I will leave you with this gem from The Castle (and no, it has nothing to do with the vibe):

Federal Court Judge: 'And what Law are you basing this argument on?'

Darryl Kerrigan: 'The Law of bloody common sense!'

I wonder what Darryl would make of FoFA.

Other articles in this edition of Unravelled

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Crowd-sourced equity funding
The Government has finally begun the process of implementing its policy on crowd-sourced equity funding (CSEF) by introducing a Bill and releasing draft exposure regulations late last year, which envisage the establishment of a CSEF regime in Australia. The Bill has been referred to the Senate Economics Legislation Committee who are expected to report later this month. Read more>>

Raising professional standards of financial advisers
Following on from the reviews conducted by the Parliamentary Joint Committee and the Financial System Inquiry, the Government delivered on its promises by releasing an exposure draft of the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2015 (the Bill) late last year for consultation. As its title suggests, the draft Bill proposes a number of amendments to the Corporations Act to raise the professional standards of financial advisers that are to apply from 1 July 2017. Many of these reforms impose obligations that licensees in the retail financial advice and superannuation trustees should carefully consider and begin making provision for.. Read more>>

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