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Client Update: Life insurance advice remuneration legislation released

4 December 2015

In brief: The Government released yesterday an exposure draft of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2015. The Government says the Bill 'removes the current exemption in the Corporations Act from the ban on conflicted remuneration for benefits paid in relation to certain life risk insurance products'. That statement is not correct. Senior Regulatory Counsel Michael Mathieson (view CV) explains.

Status quo

Conflicted remuneration is a benefit that could reasonably be expected to influence financial product advice given to retail clients. There is an exception for benefits relating to 'life risk insurance products'. However, the exception does not apply where the life risk policy is a group life policy for superannuation fund members (whether or not default members). Nor does the exception apply where the life risk policy is for a default superannuation fund member – even if it is an individual life policy. In other words, the exception 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.

Proposal – background

The exception for life risk insurance products was controversial when FoFA was introduced and has remained controversial since then. In October 2014, ASIC released Report 413 Review of Retail Life Insurance Advice, which identified a strong correlation between high upfront commissions and poor consumer outcomes. In November 2014, the Financial System Inquiry recommended that upfront commissions be banned and that only level commissions be permitted.

Mr John Trowbridge was appointed to conduct a review and his report was published on 26 March 2015. Mr Trowbridge recommended that upfront commissions be capped, but not banned. The Government made an announcement in June 2015 supporting proposals that were drawn from Mr Trowbridge's proposals. Most recently, the Assistant Treasurer announced a set of 'Retail life insurance industry reforms' on 6 November 2015. The Bill would implement the elements of those reforms concerning adviser and licensee remuneration.

Proposal – outline

Under the proposal:

  • upfront commissions would be capped as follows:
    • at 80 per cent of premium from 1 July 2016;
    • at 70 per cent of premium from 1 July 2017; and
    • at 60 per cent of premium from 1 July 2018;
  • ongoing commissions would be capped at 20 per cent of premium from 1 July 2016; and
  • a two-year clawback arrangement would apply from 1 July 2016 as follows:
    • if the policy lapses or the premium decreases in the first year, 100 per cent of the commission on the first year's premium is clawed back; and
    • if the policy lapses or the premium decreases in the second year, 60 per cent of the commission on the first year's premium is clawed back.

The Bill – main elements

The Bill would implement the proposal outlined above in a very indirect fashion.

The Bill would narrow, but certainly not remove, the exception to conflicted remuneration for life risk insurance products. In order for a benefit to fall within the exception, either of two new conditions would need to be satisfied:

  • the benefit would need to be a level benefit – with this being most relevant to a level ongoing commission; or
  • the benefit would need to satisfy premium-based caps and clawback requirements set by ASIC – with this being most relevant to a 'hybrid' upfront/ongoing commission model.

If you were to rely on the first condition – where the benefit needs to be a level benefit – there is no cap. This is a very significant point. Ongoing sales commissions on life insurance outside superannuation will continue to be exempt from the ban on conflicted remuneration if they are level commissions. Given this, it is incorrect to say that the Bill 'removes the current exemption in the Corporations Act from the ban on conflicted remuneration for benefits paid in relation to certain life risk insurance products'.

The Bill – transition

The changes made by the Bill will only apply to benefits given:

  • under an arrangement entered into on or after 1 July 2016; or
  • under an arrangement entered into before 1 July 2016, but only in relation to life risk insurance products issued after 1 July 2016.

Applying this regime to a commission on a particular life policy should be straightforward. Applying it to a volume bonus that can be dissected into amounts attributable to particular life policies – for example, where the amount of the bonus turns on the number of life policies in question – should also be possible. Applying it to a volume bonus that cannot be dissected into amounts attributable to particular life policies – for example, where the amount of the bonus turns on tiered percentages of total premiums – will be hard.

Concluding remarks

The consultation period for the Bill ends on Monday, 4 January 2016. This will be the first day back at work for many. Happy New Year, in advance.

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