Andrew Leigh (Fenner, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

Labor has worked with the financial advice sector to deliver better advice and fairer outcomes for consumers and we are supportive of any measures to improve the quality of financial advice and minimise harm caused by financial advice remuneration structures. However, there is more to do in protecting consumers from misconduct in the life insurance industry. Labor's Future of Financial Advice reforms banned many forms of conflicted remuneration for financial advisers, including for life insurance policies held inside group life policies and superannuation. However, other life insurance policies remain exempt from the Future of Financial Advice ban on conflicted remuneration.

Life insurance is a critical product that consumers use to manage risk for themselves and their families. Good financial advice can help consumers identify their life insurance needs and find appropriate and affordable products that meet those needs. Good advisers ask the right questions about a person's situation and ensure clients can confidently purchase a product that is good value for money. Should the worst happen, the quality of that advice determines when and how a customer receives the financial support they paid for.

But it is an unfortunate fact that far too many Australians have suffered the consequences of inadequate and unreliable financial advice. Media reports at the start of this year indicated that life insurance related disputes had a spike in 2014-15, according to the Financial Ombudsman Service. Across the board, disputes rose by six per cent, while disagreements over lump-sum payouts for claims of total and permanent disability rose by 20 per cent. The House will remember that less than two years after Commonwealth Bank head made an unreserved apology for the bank's financial planning division using forgery, fraud, management cover-ups and inappropriate advice—practices which led to thousands of customers losing their life savings—came the CommInsure scandal. According to reports, during the last six months of 2015 the bank's life insurance branch made a profit of approximately $200 million, while medical reports were manipulated, files went missing, doctors were cherrypicked or leaned on by claims managers to change their opinions, old policy definitions of heart attacks and rheumatoid arthritis were deliberately kept and prioritised to deny claims, and unethical policies were adopted to delay or deny total and permanent disability payments to terminally ill patients and claimants. When these allegations were raised by a whistleblower, the whistleblower was sacked.

It was reported in October this year that Westpac's life insurance arm rejected 37 per cent of total and permanent disability claims. This is an extremely grave concern for an industry that Australians rely on and for which Australians should expect the highest standard of ethics. That is why Labor will continue to argue for a banking royal commission to examine the culture of the industry and ensure Australians can tell their stories.

A series of reports have shown the need for reform to the method of remuneration for life insurance advisers. ASIC Report 413: Review of retail life insurance advice identified a strong connection between up-front commissions, policy lapse rates and poor consumer outcomes. It found, among other things: 45 per cent of advice provided under an up-front commission model failed to comply with the law, as opposed to only seven per cent of non-upfront advice; and 82 per cent of industry uses an upfront commission model and that up-front commissions for advisers are generally between 100 to 130 per cent of the product premium. The industry-commissioned Trowbridge review recommended several reforms to adviser remuneration, including a significant reduction in up-front commissions. Finally, the Financial System Inquiry recommended the abolition of up-front commissions and a move to level commissions, which means that the commission remains the same year after year.

According to ASIC, the up-front commission model is the main remuneration structure for life insurance. ASIC also found that up-front commissions have a 'statistically significant' bearing on the likelihood of an adviser who is working on commission giving advice that does not comply with the law. According to ASIC:

High upfront commissions give advisers an incentive to write new business. The more premiums they write, the more they earn. There is no incentive to provide advice that does not result in a product sale or to provide advice to a client that they retain an existing policy unless the advice is to purchase additional covers or increase the sum insured.

Because life insurance commissions are tied to selling, not giving advice, an incentive is created to sell insurance rather than provide strategic advice. This can lead to clients receiving poor value for money.

It was because of these concerns that Labor supported the life insurance framework bill when it was first introduced to parliament earlier this year, before the election, and that remains our position. But, as we noted then, we have some reservations about the reforms. Industry has been engaged in a long process of consultation and, while there is broad industry agreement on the need to reform the structure of commissions, some groups have voiced concerns or feel their voices have not been heard in the process. The Association of Financial Advisers has stated that 'the vast majority' of its members are supportive of the reforms, but a small group of financial advisers, known as the Life Insurance Consumer Group, has been vocal in its opposition to the bill. We also acknowledge concerns of consumer groups that the bill could go further in protecting consumers. CHOICE Chief Executive Officer Alan Kirkland has said:

Commission-driven churn is one of the major problems in this industry and we think that provisions to claw back commissions should extend for at least three years as originally proposed.

While this bill goes some way to reducing the incentives that can encourage financial advisers to recommend inappropriate life insurance products to consumers, it does not address misconduct on the part of the insurers themselves. For example, it would not address the poor claims-handling practices publicised in the CommInsure scandal and recently detailed in ASIC's Report 498: Life insurance claims: an industry review.

The first version of the Financial Services Council's Life Insurance Code of Practice, released in October this year, aims to improve consumer outcomes in the life insurance sector. But there is too much that it does not cover and much more work to do in this area. I note that the minister for revenue and financial services, Senator Gallagher, has stated that Treasury is looking into further amendments to the Corporations Act in response to the ASIC report.

Michael McCormack (Riverina, National Party, Minister for Small Business) Share this | Link to this | Hansard source

Shadow minister.

Andrew Leigh (Fenner, Australian Labor Party, Shadow Assistant Treasurer) Share this | Link to this | Hansard source

The shadow minister. Thank you. I appreciate the interjection.

First of all, this bill does not guarantee that new standards will be enforced. It also does not address concerns with the way the life insurance industry handles claims. It does address issues of conflicted remuneration for financial advisers selling life insurance products, but it ignores extant concerns about conflicted remuneration for claims handlers, who have a role no less important than that of financial advisers, since they are required to make fair and appropriate decisions about the merits of a life insurance claim. So, I note with some disquiet ASIC's recent report demonstrating that at least two life insurers were still paying remuneration with incentives based on how many claims were denied.

Finally, the bill as a whole does not seek to remedy the clear cultural and operational concerns that have become obvious and destructive within the banking and financial services sector. Nonetheless, Labor will support the modest reforms in this bill in the hope that they can improve consumer confidence in the quality of financial advice on life insurance. But we do note that this bill stops short of the recommendations of the Financial System Inquiry and the Trowbridge review to remove up-front commissions. The package still allows for up-front commissions but caps them.

Unfortunately, because the start date has been pushed back from mid-2016 to the beginning of 2018, the 60 per cent cap will not be reached until 2020. This is a long lead period for a modest reform that was agreed to by industry in 2015. Had the government been well organised to progress it, the bill could have been law well before 1 July 2016.

In addition to the limits on the quantum of up-front commissions, the package introduces a two-year 'clawback' of up-front commissions. This means that up-front commissions will have to be paid back to the life insurer by the financial adviser in the event that the policy lapses. It will not be until 2020 that these reforms are fully implemented. We think that the ASIC review, now scheduled for 2021, will be important in making sure that these reforms improve consumer outcomes.

We welcome the implicit endorsement of the Future of Financial Advice framework from those opposite that this bill represents. It represents steps to better align the standard protocols of financial advisers with the interests of consumers, and it addresses concerns about advisers 'churning' clients through products. Labor will help the government pass this bill and we will watch carefully as it is implemented. We will also scrutinise the bill as it begins operation and look forward to ASIC's review at the beginning of the next decade.

Graham Perrett (Moreton, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak on the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016. More than half of all Australians have some form of life insurance. I know it is an important part of the way people make personal arrangements. I acknowledge all of the workers in the insurance industry generally. I got to know them a lot better during the 2011 floods—not so much the life insurance industry but the general insurance industry—after my electorate was hammered by the floods, and then I was Chair of the Standing Committee on Social Policy and Legal Affairs, which conducted two inquiries into insurance more generally, and I got to see behind the call centres, and see behind the policies and the processes, and to acknowledge the large number of people who make a contribution through the insurance industry.

The life insurance industry specifically generates more than $56 billion annually in premiums; it is very significant and very substantial. There are around 28 registered life insurers operating in Australia at the moment. The Future of Financial Advice, or FOFA, reforms implemented by the Gillard government provided a general ban on financial advisers being offered remuneration when they sold a financial product to a consumer—not something that is familiar to lawyers. I see the member for Perth is in the chamber; certainly in his former life as a lawyer, I guess, the idea of giving legal advice when you are 21 and still being remunerated for that when you are 61 has a certain appeal!

Michael Sukkar (Deakin, Liberal Party) Share this | Link to this | Hansard source

Hear, hear!

Graham Perrett (Moreton, Australian Labor Party) Share this | Link to this | Hansard source

but it is not something that lawyers were able to achieve—and I will take that interjection from the other side of the chamber. Obviously, as lawyers, you are paid for the advice you give when you give it and that is the end of the matter but, with financial advice, there is the potential for your advice to be remunerated in the future. Then, in fact, you could sell your books in a way, and give that advice that you had given to someone else to still take payment for that in the future. That is not something that lawyers are familiar with but, as I said, the Gillard government brought in the FOFA reforms that ended much of that practice. Those reforms protected consumers from financial advisers who would act against their client's interests in order to gain remuneration on the sale of a product—or, I should stress, the possibility of that. There were some exemptions to that general ban, including where the benefit related solely to a life insurance product that was not part of a superannuation scheme.

Several recent reports have made it clear that further reform is needed to ensure that the consumer's interests are not being disregarded in the pursuit of greater remuneration for the financial adviser. The ASIC report Review of retail life insuranceadvice found that 82 per cent of the life insurance industry provides upfront commissions to advisers which are generally between 100 per cent and 130 per cent of the product premium. The Trowbridge review, which was commissioned by the industry itself, recommended a significant reduction in upfront commissions, and the Financial System Inquiry recommended to abolish upfront commissions altogether. I know this is a significant issue. I have met with seniors in my electorate, both at the regular morning teas and also at the big seniors morning tea I hold with the Macgregor Lions every year, where this has been raised as an issue.

The bill that is before the chamber removes the current exemption from the ban on conflicted remuneration for benefits paid in relation to life insurance products. ASIC will be empowered to make a legislative instrument to permit benefits for life insurance products to be paid to an adviser, provided certain requirements are met. The reforms in this bill go some way to addressing the concerns by reducing incentives for financial advisers to recommend inappropriate life insurance products, but Labor still has significant concerns that the clawback period in this bill is only two years—one year less than the original industry agreement. This means that financial advisers will get to keep their upfront commission even if they move a client onto a new product after just two years.

Mr Deputy Speaker Buchholz, from your work done in this area on the economics committee, you know that commission-driven churn is considered by consumer groups to be one of the major problems in the industry, but the bill does not address misconduct of the insurers at all. Earlier this year we were all appalled by the reported cases of people who were insured by CommInsure, the Commonwealth Bank's insurance arm, and were denied payment of their claims—and I should declare that I am a shareholder of the Commonwealth Bank and also a policyholder of CommInsure. One of the examples given was of a 46-year-old man who had a heart attack that was so severe his heart actually stopped, and he was revived by nurses with a defibrillator. However, his CommInsure claim was denied because his blood tests did not reveal enough of the protein troponin in his blood after the attack. The CommInsure policy included a definition of 'heart attack' that relied on a very precise measurement of troponin in the bloodstream before an attack that would be deemed to be a heart attack under the insurance policy. Experts in the field of cardiology were reported to say that it was not possible to diagnose the severity of a heart attack based on troponin levels alone. The definition was completely out of step with current medical practice but, sadly, many people were denied their claims because of this outdated definition that was inserted into the fine print of the policy.

Then there was one of the Commonwealth Bank's own employees who reportedly was fired after suffering major depression and post-traumatic stress disorder following a violent assault. In an appallingly insensitive episode, the Commonwealth Bank terminated the man's employment, relying on a psychiatrist's report which said that he was not able to function in the bank or the general workforce. When the man made a claim to the insurance arm of the same bank, it was denied by relying on the same psychiatrist's report, and insisting that he was capable of returning to work. The claim took 2½ years to assess, during which time the man, a good employee who had endured stress and damage, reportedly was forced to sleep in his own car—a sad state of affairs. It has also been reported that the family of a woman who died from an accidental overdose of prescription drugs was denied a payout on her life insurance. Despite a police investigation and a post-mortem concluding that the woman died of an accidental overdose, CommInsure told the family that the claim would not be paid, because suicide was excluded under the policy.

The Commonwealth Bank's Chief Executive Officer, Ian Narev, gave evidence to the parliamentary inquiry earlier this year, where he told the inquiry that CommInsure have now changed their definition of heart attack. But, despite the shocking revelations of consumers being denied their legitimate claims, Mr Narev told the inquiry that not one person had been fired from CommInsure. These companies, many insurance companies, are raking in billions of dollars each year in premiums, but it appears that getting them to pay out on a claim is almost as difficult as getting blood from a stone.

These are some of the systemic issues that this bill cannot possibly address. It deals with some of the culture issues in the banking and financial and insurance industry that have been a concern for many MPs on both sides of the House. In fact, I think the MP for Dawson has recently come out in support of the idea of a closer look, and I think that the New South Wales senator, Senator Williams, has also indicated support for a royal commission into the banking and financial services industry. Sadly, we are not seeing that here in the chamber of the parliament.

Australians have traditionally had confidence and trust in the fairness of our financial services industry, including the life insurance industry. We need to see that reinstated. We need to have confidence and trust in these institutions. Sadly, too often when we listen to the radio, we see scandal after scandal associated with the banking and financial services industries, and too many people have been affected. We have seen it in the bush, we have seen it in the city, and we have seen it in small business and in big business, too often. Too many people have been affected. Some have lost their savings that they have spent a lifetime accumulating. As MPs, we have all had people come and talk to us about some of those scandals—some that particularly affected those in Queensland. There is nothing more heartbreaking than hearing someone in their 60s or 70s say they made what appeared to be reasonably prudent investments, only to find out they were ripped off by people. And, if they are being ripped off by those associated with those major institutions, that is when good government steps in.

A royal commission into the banking and financial services industry would be empowered to do things that the current set of arrangements cannot. It would be empowered to examine issues including: ascertaining just how widespread instances of illegal and unethical behaviour are within Australia's financial services industry; how Australia's financial services institutions treat their duty of care to their customers; and how the culture, ethical standards and business structures of Australian financial services institutions affect the behaviour of these institutions. A royal commission could look at whether Australia's regulators are really equipped to identify and prevent illegal and unethical behaviour. It could find out about comparable international experience with similar financial services industry misconduct and best-practice responses to those incidents and other events that may emerge over the course of investigating the above.

Sadly, the Turnbull government's approach of calling bank executives down to Canberra once a year to have a cup of tea will not go anywhere near addressing these significant issues that I have detailed. Sadly, I cannot expect the economics committee, which is chaired by the member for Banks—I kid you not—and where the Liberal Party have the numbers, to have any effect on banking culture beyond the questioning of executives on a yearly basis, where they will be a little bit uncomfortable.

I know that many people in Moreton, not just retirees, have approached me about this issue. They have had concerns about banks. They have had concerns about the insurance industry. There is much more to be done in both of these sectors and there is much more to be done with this piece of legislation before the chamber.

Craig Kelly (Hughes, Liberal Party) Share this | Link to this | Hansard source

I rise this evening to speak on the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016. Before I get on to some specific comments about the bill, I would just like to respond to some of the comments from the member for Moreton, because he is clearly wrong and the opposition is wrong in its insistence on a royal commission. What the member for Moreton, in his speech, identified was a series of cases where there was a dispute over whether a claim on a life insurance policy should have been paid. Someone had paid the premium and believed that they were entitled to make a claim. And there was a dispute. Commercial disputes happen.

How will a royal commission sort out these disputes? It will not. This is why. The government's proposal to have a tribunal is far, far superior. At the moment the problem that we have is access to justice. If an individual believes that a large insurance company has done the wrong thing by them—and if that amount is above the level where the Financial Ombudsman Service can make a determination on that matter, as it often is—the only alternative, currently, that that person has is to take their claim to the Supreme Court. Unfortunately, in our legal system, the cost of an individual consumer taking their claim to the Supreme Court simply rules out that possibility in its entirety. And that is where the imbalance and the problem is.

A royal commission is not going to solve that problem. All a royal commission would do would be—after a lot of lawyers had run up hundreds of millions of dollars in legal fees—to come up with, maybe, a solution or a suggestion or a recommendation that there should be a tribunal to try to level the legal playing field. Our proposal is: if someone had a claim and believed that that claim should have been paid out but had been rejected by a large insurance company, they would have the ability to take that to a low-cost tribunal to have the issue determined. And why a royal commission would be so detrimental is that a royal commission would not have the power to make those decisions. A properly functioning tribunal is a step above a royal commission.

I would ask members from the opposition: let us work together on this. Do not go down your one-track proposal of a royal commission and nothing else. Let us work together because, with the tribunal, the devil will be in the detail. Let us work together and try and get the details of how that tribunal will work in the best way possible so that those consumers who have had the wrong thing done by them can get true access to justice and, if there has been a breach of the contractual terms, or unconscionable conduct, or misleading and deceptive conduct, those consumers can get fair and just compensation.

I will give another reason why a royal commission is such a bad idea. Under the provisions of our competition act, if there has been unconscionable conduct, or if there has been misleading and deceptive conduct, there is a six-year statute of limitations from the time the conduct was first identified. So the risk is this. Say someone had suffered an adverse consequence or was in a dispute and felt they were badly done by, by a bank or a large insurance company, and say that happened in 2013. Now it is three years plus. If we go down the track of a multi-year royal commission, then, by the time that royal commission gets around to deciding what we know now—that we need a tribunal to determine these cases on a low-cost basis—the risk is that that six-year statutory period would have expired. So the whole idea of getting these people compensation would have been ruled out and they would have been timed out because the Labor Party would have argued against this tribunal, through wanting to go for this show of a royal commission, and timed these people out from having their claim determined. That is why it is such a poor idea to have a royal commission.

When it comes to talking about changing the culture of banking practice, a lot of that culture comes about now because the large insurers and the large banks know—whether it be a small business or a consumer—if they are in a commercial dispute and they know it cannot be handled by the financial services ombudsman because it is above the threshold and the only access to justice for that consumer or small business person is through the Supreme Court, they know it is not a level legal playing field, and they know they can play hardball. They know if the consumer goes, 'Well, I'm going to take you to court', they can laugh at that.

If we are able to fix that problem with a functioning tribunal that levels the legal playing field, that gives someone who has a legitimate claim—and who has been unconscionably dealt with by a large bank or insurance company—the opportunity to have their claim determined in a low-cost, efficient and quick manner, without all the legal procedures and run-up of costs, that is what will change: the culture of the banking sector.

I would hope that members of the opposition would put down their 'opposition for the sake of opposition', work with the coalition on this and let's get that tribunal. Let's make it have all the powers of a royal commission but with the additional powers to be able to make determinations and award legally binding compensation.

On the specifics of this bill, I note that this bill does have bipartisan support but I must admit that I have some concerns with the bill. To start with, I was actually quite shocked at the size of the life insurance industry. The report from the Australian Prudential Regulation Authority said that, as at 30 June 2015, we had 28 registered life insurance companies operating in Australia. So there is plenty of competition. We have 28 companies offering life insurance products, and the net premium income follow-up 2014-15 alone was $60.9 billion. That is an extraordinary sum of premiums that are paid into the life insurance industry. That is the net premiums.

Those 28 large life insurance companies obviously have numerous ways they can get consumers to sign up and buy one of their policies. They could have commissioned salesman or brokers—as many are. They could also have just salaried staff, working on a certain salary, working for them, selling those to consumers. They could also sell them online, with basically no commissioned sales people or no salespeople whatsoever. What this bill is actually doing is putting in a form of price control that regulates what those commissioned life insurance salesmen or financial advisers are paid.

Let's just go through what is being proposed in this bill. Firstly, there are up-front commissions. Often we talk about an up-front commission and we talk about 100 or 120 per cent or higher of the annual premium. That often seems excessive. But whether it is 120 per cent or whatever it is should be almost irrelevant. What should be relevant is the cost of the financial service and advice that the financial adviser is giving. How many hours has it taken him to compile that advice to give to that client? That is what I see as more relevant than whether we saved 120 per cent or 110 per cent—that is outrageous.

Under this bill, ASIC will have the power to see the average 110 to 120 per cent commissions on a premium reduced to 60 per cent from 1 July, and permit ongoing commissions to be set at a maximum of 20 per cent. I cannot think of many other areas in the economy where the government is stepping in to reduce the payments or to set effectively a price cap on what financial advisers can be paid. I am at a loss as to why this is happening. This is a market where there is a lot of competition. There may be arguments about why that is, but that current arrangement has been negotiated by those 28 large life insurance companies with the financial services. So they are now coming to the government, saying, 'We think we're overpaying our sales staff. We want you to cut their commissions.'

Second is the issue of claw-backs. Claw-backs come about with what the industry describes as churn. Someone has a policy for maybe one or two years, then they change it to another insurance company and they may change it to another insurance company. By itself, there is nothing wrong with that. Consumers should be able to change over the years if they find a better policy. If they find a better credit card offer, they should be able to change. If they find a better housing loan, they should be able to change. They should be able to change their bank. There is nothing wrong with that. The only problem that comes about is when those large financial insurance companies have decided they would pay these large up-front commissions, and then they have to continue to pay them time after time, and that becomes an incentive perhaps for the financial advisers to sell the policies and to churn the policies over.

But, again, I am at a loss to see why this is something that those 28 large registered life insurers cannot negotiate themselves with the industry. We have a long, long history throughout the world that wherever governments have tried to enter the market and fix prices it has had substantial adverse consequences to consumers. The best tool to fix any problem is to make sure that there is adequate competition. Competition is always a better tool than price fixing by governments.

When it comes to competition, there are some things that we should work on—and we are—things like better disclosure. If someone signs up to an insurance policy, let them know what percentage commission the salesperson is getting. Let them know what percentage of claims are being paid by that life insurance company. That something that we know ASIC is working on at the moment—a very important step. If a particular insurer has knocked back 37 per cent of claims and another insurer has knocked back five per cent, I know where I as a consumer would want to take out a life insurance policy. That is the best indicator. The only reason I can support this bill is that there will be a review in 2018, which will look to see if there have been improvements in the industry and what the effects have been.

I say in conclusion that we need to be very careful in government. It is very easy to think that government knows best—that it knows what the prices should be and should try and set fair prices. The history of economics throughout the world has shown that that fails. The other issue is that, like anything, when government comes into control something, there are many ways around it. Yes, a large insurance company may be restricted in what it can pay in commissions, but there are many ways other than financial remuneration. What is to stop one of those large insurance companies as an incentive giving a financial adviser a free trip to a conference in the Maldives? These are all issues that we need to look at. At the moment, with great reluctance, I support this bill, but we need to monitor this closely to look out for those unintended consequences, because the history of governments interfering in the market and setting prices has always been a disaster.

Matt Thistlethwaite (Kingsford Smith, Australian Labor Party, Shadow Parliamentary Secretary for Foreign Affairs) Share this | Link to this | Hansard source

I speak in support of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, which builds on the strong record that Labor had when we were in government of protecting consumers in the financial services and insurance industry in Australia. This bill builds on the Future of Financial Advice reforms that were put in place by the previous Labor government in the wake of many scandals in the financial planning and life insurance industries. They included Trio Capital, Storm Financial and, in recent years, Timbercorp. In only the past couple of years we have seen the CommInsure scandal, where literally thousands of consumers have lost money and have been worse off because of unscrupulous financial planners, advisers and people who were selling to consumers products that were not in their best interests. When Labor was in government, with the FOFA reforms we introduced a ban on conflicted remunerations. We introduced a best-interest duty to ensure that consumers were protected from unscrupulous financial planners and that the financial planner had a duty, by going through a checklist, to act in the best interests of the consumer. Of course, when Labor introduced these reforms, they were opposed by the coalition. Much the same as the previous speaker did, they said that they were interference within the market and that they would leave consumers worse off. What we have seen, of course, since that time is scandal after scandal in the financial services industry, highlighting the need for, if anything, stronger financial planning reforms and stronger reforms in the insurance industry—and this bill does that.

Life insurance policies, particularly those held through group life policies and superannuation, were covered by FOFA. However, other life insurance policies remain exempt from the FOFA ban on conflicted remuneration, and addressing that is the purpose of this bill. This bill reduces the capacity for conflicted remuneration in the life insurance industry, with the aim of improving outcomes for consumers while recognising the need to lower underinsurance rates in the life insurance industry. The main provisions of the bill, which is scheduled to commence on 1 January 2018, are the phasing down of up-front commissions to a maximum of 80 per cent from 1 January 2018, 70 per cent from 1 January 2019 and 60 per cent from 1 January 2020, together with a maximum 20 per cent ongoing commission; and a two-year retention, or clawback, period which requires advisers to repay premiums received in the case of policy lapse in the first two years of a policy as follows: 100 per cent of the premium in the first year of the policy and 60 per cent of the premium in the second year of the policy. The bill enables the Australian Securities and Investments Commission, ASIC, to make a legislative instrument to permit benefits in relation to life risk insurance products to be paid, provided certain requirements are met. These requirements relate to the quantum of allowable commissions and to clawback arrangements, where a certain portion of the up-front commission is paid back to the life insurer by the financial adviser in the event that the life insurance policy is cancelled or the premium is reduced. This bill introduces a ban on volume based payments in life risk products and includes transitional, or grandfathering, arrangements in the Corporations Act. The bill gives ASIC the power to create an instrument that sets the maximum permissible up-front and ongoing commissions. There will be no ban on level commissions—commissions where the same commission is paid for each year of a policy—nor will there be a ban on fee-for-service arrangements. ASIC will be required to conduct a review of the reforms in 2021.

Underinsurance in Australia is, sadly, not a new concept. In 2013 underinsurance provider TAL—sorry, insurance provider TAL. Well, they are underinsuring; I think everyone is underinsuring! TAL found that only 30 to 37 per cent of Australians aged 18 to 69 held some form of life insurance. Only 11 to 18 per cent held disability cover, income protection insurance, or critical illness and trauma cover. In 2014, KPMG released a research project into underinsurance in Australia for people aged 18 to 64. The report found that around 35 per cent of people in Australia have no disability insurance at all. Of the age group 45 to 64, nearly 77 per cent were found to be underinsured. In October this year, CANSTAR noted that Australians are underinsured to the value of about $1.8 billion.

Australia needs a system that promotes insurance take-up by consumers, and the best way to promote insurance take-up, particularly life, disability and income protection insurance, is to ensure that Australians have confidence in the system and in those who are selling those products into the Australian market. That is the aim of this bill—to provide reassurance and confidence that people cannot be ripped off, if you like, by products where commissions and other payments are being hidden from the public by those who are receiving them.

Labor supports this bill on the basis that it modestly improves protections for consumers with respect to life insurance products; however, more work is needed to be done. There is much more work that needs to be done in terms of protecting consumers. This bill does not address broader issues in the life insurance industry, such as issues with claims handling and outdated medical definitions which have come to light in recent months through the banking inquiry and the CommInsure scandal. However, if we are going to be serious about tackling some of the problems that exist in the insurance industry then only a royal commission will get to the bottom of exactly what is going on in banking and financial services.

A series of reports have shown the need for reform in the way that insurance advisers are remunerated. ASIC Report 413 Review of retail life insurance advice identified a strong connection with upfront commissions, policy lapse rates and poor customer outcomes. The factors ASIC identified that affected the quality of advice were: adviser incentives, inappropriate scaling of advice, a lack of strategic life insurance advice, weak rationales for product replacement advice and failure to consider the relationship between life insurance and superannuation. After reviewing over 200 files, ASIC found that the way advisers were paid had an influence on the likelihood of their clients receiving advice that did not comply with the law.

ASIC's report found, among other things, that 45 per cent of advice provided under an upfront commission model failed to comply with the law, that 82 per cent of industry uses an upfront commission model and that upfront commissions for advisers are generally between 100 to 130 per cent of the product premium. The industry-commissioned Trowbridge Review recommended several reforms to adviser remuneration, including a significant reduction in upfront fees. Finally, the Financial System Inquiry recommended the abolition of upfront commissions and a move to level commissions.

There has been a series of these reports, a series of these reviews, in the wake of all these scandals that we have seen in the industry. I have to comment on the previous speaker's comments that these will all be solved by a banking tribunal. We all know that is complete and utter rubbish. A tribunal will not have the power and will not have the expertise to get to the bottom of what exactly is going on in this industry. A tribunal has been panned by consumer advocacy groups, and all of the banks have come out over the course of the last couple of days saying that they do not support a tribunal. The government cannot explain how a tribunal will work; how people will be appointed to it—whether or not it will be in the form of a membership corporation or if it will be a judicial body established by statute with power to not only make decisions but enforce those decisions; and what an appeal mechanism will look like.

Also, we have seen through the scandals that have come out in this industry that a tribunal is simply not good enough. The previous speaker made the comments that, essentially, what has gone on in the CommInsure scandal and other insurance providers with product problems with inappropriate products being sold and with medical definitions being changed are essentially just commercial disputes. They are just commercial disputes between an insurance company and the people who happen to take out those policies and did not like the way the insurance company looked at the definition and made a decision on their claim. Well, tell that to the thousands of people who have now had their insurance claims denied because some insurers use outdated medical definitions from the 1940s to basically deny claims.

The whistle was blown on this by medical experts who worked for these insurance companies—doctors who have an oath to provide the right advice to clients and to patients. They got uncomfortable about the fact that the definitions they were being asked to change reports on and to deny claims on were not up to date. The definition of 'heart attack' and the definition of 'rheumatoid arthritis' simply did not meet modern medical practices, and several of these doctors blew the whistle on what was going on, particularly at the Commonwealth Bank. They took their complaints to their immediate managers and they were ignored. They took their complaints to their divisional heads and they were ignored. It took Dr Benjamin Koh at CommInsure taking the issue to an independent director on the Commonwealth Bank board before action was taken and a review was conducted.

In many of these cases, it takes the media getting involved before the banks and insurance companies take action. That is not simply a commercial dispute between an insurance company and its customers; it is the deep-seated problems with this industry that only a royal commission will be able to get to the bottom of. I do not know why this government is siding with the banks on this. I do not know why this government is doing the bidding of the banks and ignoring the pleas of the Australian people who are fed up with, and sick and tired of, the actions of banks and who want a royal commission into this industry. It is only Labor that supports a royal commission. It is only Labor that can deliver a royal commission into the banking industry.

In terms of the ASIC review into the insurance industry, they will complete their reforms in 2021. The data that ASIC relies on for its reviews will be largely based on transitional commission levels and may not necessarily give a clear picture on the impact of these reforms.

We should note the continuing uncertainty around ASIC's resourcing as a result of the user-pays ASIC funding model and recent budget cuts, as it relates to ASIC's ability to do this review. This is a big issue and something that was identified by ASIC representatives when they appeared most recently before the House of Representatives economics committee. They highlighted the fact that the government is giving them all these additional reviews to undertake, all this additional work, but no additional funding to perform those tasks. You cannot expect a regulator—and a properly well-informed regulator—to do its job if it does not have the budget and staff to complete that work.

Our No. 1 priority on this side of the chamber is to ensure that customers are protected and that when they are seeking financial and insurance advice they can have every confidence that their planner and those offering that advice are acting in accordance with their best interests. That is the basis on which we implemented the FoFA reforms and that is the basis on which we are supporting this modest reform here today. But we do need to go further: we need a royal commission into banking and insurance in this country.

Milton Dick (Oxley, Australian Labor Party) Share this | Link to this | Hansard source

I begin my remarks on this Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 by saying how important this issue is for me and how I have been touched by a number of victims in my own electorate. In 2011 I represented, in the Brisbane City Council, parts of Brisbane that were devastated by the January floods. Homes, businesses and local communities were torn apart as a result. From that, and listening to the heartbreaking stories of so many of my local residents, when I saw this issue come before the House, I wanted to make sure that my voice was proudly and very strongly associated with reforms on life insurance remuneration arrangements.

When you listen to victims, and the pain and heartbreak they have had to go through, it is incumbent upon every single member of this House to do whatever they can to use the instruments at their disposal. I listened to the member for Hughes talk about how government was not necessary, how you have to be careful about government. If there was ever any evidence to suggest that government does need to intervene and government does need to take a firm hand, it is in this industry. Those opposite talk a lot about government not being involved in people's lives. I am yet to meet victims and people who are suffering greatly come up to me and say, 'Gee, I'd like a little less government in my life.'

We serve communities around Australia, here in this place, and we have a job to do: to make sure the most vulnerable, and those who need protection, get protection. The importance of life insurance cannot be underestimated. I know, from talking to a number of my local residents, that life insurance is ensuring a peace of mind and financial protection in difficult times, not just in times of natural disaster but also in illness, accident, disability and, sadly, death.

When it comes to the provision of financial advice relating to the endorsement of life insurance products we do support measures that increase quality, transparency, protections for consumers and reduction in the opportunity for people to be ripped off. When listening to the member for Kingsford Smith, I was reminded of Labor's proud record in the area of financial advice reforms. The FoFA reforms not only increased access to quality financial advice but also gave the industry a stronger foundation for growth.

This bill removes the exemption contained in the act from the ban on conflicted remuneration. It applies a ban on volume based payments to life insurance and includes grandfathering arrangements and, as we heard today, a two-year clawback period, where a portion of the up-front commission is paid back to the life insurer by the financial adviser if the life insurance policy is cancelled or the premium is reduced.

In preparing for today's debate and going through the ASIC reports I know there are 14 million group life insurance policies, which are typically sold through superannuation; four million retail life insurance policies, distributed by insurance brokers and financial advisers; and around 3.9 million direct life insurance policies, sold through direct contact with a life insurer or affiliate, such as a bank.

The growth in non-advised and retail policy sales is important to acknowledge in today's debate. In 2013 non-advised policy sales totalled 3.6 million, and 3.8 million in 2014, and by 2015 it was up to 3.9 million. Retail policy sales also experienced growth over the same period. The 2013 retail policy sales totalled around 3.6 million and up to four million by 2015. These reports have indicated to Labor members why we need reform of the way life insurance advisers are remunerated.

ASIC report 415 Review of retail life insuranceadvice identified a strong connection between up-front commissions. I refer to page 43 of the policy. Looking at the graphs, and hearing the debate today, 45 per cent of advice provided under an up-front commission model fail to comply with the law. At paragraph 90 of the report 82 per cent of industry uses an up-front commission model, and up-front commissions for advisers are generally between 100 and 130 per cent of the product premium. A 2013 report by Rice Warner shows the average retail term life insurance product, which pays a benefit on the death of the insured, is around $246,000.

While we support the bill we do hold some serious concerns about some aspects of it—namely, we do not believe there are enough measures in it that may reduce incentives for financial advisers to endorse inappropriate life insurance product. It would not capture misconduct on the part of insurers themselves, and we heard a number of speakers today talk about the CommInsure scandal. The two-year clawback period is one year less than the three-year period in the original industry proposal of 2015. Leading consumer advocacy group, Choice, said:

We are disappointed that today's announcement will allow advisers to hang onto their upfront commissions if they seek to move a client to a new product after two years. Commission-driven churn is one of the major problems in this industry and we think that provisions to claw back commissions should extend for at least three years as originally proposed.

The package we are dealing with today stops short of the recommendations of the FSI and the Trowbridge review to remove upfront commissions. The cut will initially be set at 80 per cent of the cost of the first-year premium. It will go to 70 per cent in the second year to which the bill applies, before settling at 60 per cent of the cost of the first-year premium up front. The package also caps ongoing commissions at 20 per cent, which I support.

Due to some of the changes that have occurred, the start date has been pushed back from 1 July 2016 and will now be 1 January 2018. It appears the 60 per cent cap will now not be reached until 2020. I think that this is a long time for the introduction of what is pretty much a basic reform, but we are seeing movement in this area, and Labor will be supporting the bill. We supported the bill when it was first introduced to the House and when it first came through this place on 3 March 2016.

I want to touch on some of the shocking cases that I have read about and that ASIC has outlined in its recent Report 498: life insurance claims: an industry review. When you hear about some of these shocking claims, it is nothing more than heartbreaking.

I read the case of a woman who was diagnosed with cervical cancer and, after receiving both radiotherapy and chemotherapy treatment, was ill and could not work. The insurer had been paying monthly benefits but then informed the policyholder that it had cancelled the policy as she had not disclosed that she had experienced depression several years before. The insurer claimed that, had the policyholder disclosed her depression from several years before when she applied for the policy, it would not have offered insurance cover under any circumstances. The policyholder observed that the non-disclosure was innocent and that she had never been depressed enough to require medication or time off work. Thankfully, the matter was resolved between the parties, but the amount of stress that I can only imagine the policyholder would have gone through was unacceptable.

The other case was where a metal object accidentally lodged in a policyholder's heart, leading to cardiac arrest and requiring open heart surgery. Apparently, this did not meet the policy definition of 'trauma' as, under the policy, only heart conditions related to congenital conditions and/or out-of-hospital cardiac arrests caused by arrhythmia were covered.

These kinds of examples, when you read them, see them and hear them, are clear evidence to me about the action that we need to take. There is a need to have strong regulation and strong bodies in place to address the stress and strain that millions of Australians could perhaps face. People need peace of mind that when they pay for insurance for medical conditions their claims will be met.

ASIC's analysis of the dispute data, in light of insurers' claim numbers by share of claims, indicated that for three insurers the number of disputes, particularly about heart attacks, was adversely disproportionate to the share of claims. For example, one insurer's share of heart attack definition disputes was six times their share of claims. ASIC also reports that a leading bank in Australia declined 37 per cent of claims for total and permanent disability between 2013 and 2015 and declined 31 per cent of claims made under trauma cover.

There is a litany of dodgy practices that we have all seen through the media. There is the practice that we heard about today of 'twisting and churning,' which the member for Fenner made remarks about. This is where consumers are encouraged to cancel existing policies and take up new ones, often to their detriment. I read about the case of a man in New South Wales who was twisted out of a policy three times in a 12-month period by the same insurance agent, but when the man claimed costs for skin cancer treatment, he was told that it was a pre-existing injury on his new policy and he was refused payment under the policy. Sadly, a Queensland couple, both of them pensioners, were sold a policy that excluded claims being paid to people on a pension. So, pensioners are being signed up and are giving their money over, but the policy does not apply to them.

There is also a worrying practice that I have read about—the practice of 'tombstoning'—which involves agents signing up dead or non-existent clients and secretly paying for their initial premiums just to pocket larger commissions. These fraudulent applications for insurance are done simply to drive up the sales. Agents are being pressured to sell as many policies as possible to win prizes, promotions and—as we heard about earlier in today's debate—apparently, overseas trips.

Agents are falsifying or omitting medical, income, occupation or date-of-birth information simply to maximise commissions, making the policy worthless upon a claim because insurers may refuse to pay out a policy if the incorrect information is supplied. Agents are preying on residents in remote communities and, particularly in Queensland, some of the Indigenous communities. Of course, we know the shocking case that was revealed on Four Corners, where the whole financial services industry clearly demonstrated that it needed to be further investigated, with doctors being pressured to change their assessments of customers, payouts being delayed to terminally ill customers and, as I indicated before, heart attack claims being refused by relying on outdated definitions inconsistent with current medical practice.

I have one thing to say about this: this is clearly about putting profits first. They are worried about the end dollar, not the end product. Everything else comes a distant second. If these cases were not warning enough, were we serious about consumer protection we would be having a royal commission into our financial and banking sector. It is not good enough for excuse after excuse. Little wonder that there have only been two speakers on this bill today. This is a serious issue. We heard the member for Hughes simply dismiss the need for a banking royal commission because—in paraphrasing—'these things happen'. They should not happen. People who live in my suburbs in the south-west of Brisbane were unfairly targeted through no fault of their own in the 2011 floods, where their homes and literally their livelihoods were washed down the street. Their records, their photographs, their lives were destroyed within a 24-hour period because people were sold incorrect policies. Some of the people selling those policies were more worried and focused on commissions because that was their livelihood; I understand that. Those who most need it, those who are vulnerable and those who need protection need quality life insurance. They need protection to make sure that insurance is what it is and that they are not being robbed. I will continue to support these reforms for a fair go for all people.

Matt Keogh (Burt, Australian Labor Party) Share this | Link to this | Hansard source

It is quite surprising really that we are here today given that it was so many years ago that the Labor Party, in government, put forward the future of financial advice reforms, acknowledging then how important it was to tackle the link between remuneration and corruption of advice. Making sure that clients receive advice in their best interests has taken this long to resolve through this legislation.

Of course after those excellent reforms were put forward by the Labor government, one of the first things that happened upon the election of the Liberal-coalition government was that the government tried to roll back the FoFA reforms. The FoFA reforms ban many forms of conflicted remuneration for financial advisers including for life insurance policies that were held as group life policies. But other life insurance policies have remained exempt from the FoFA ban on conflicted remuneration.

Many speakers here tonight have spoken about some of the real world examples that have arisen from conflicted remuneration. Indeed only on Friday the Joint Committee on Corporations and Financial Services heard evidence from ASIC dealing with the issue of conflicted remuneration. Just what does about conflicted remuneration mean? What is a conflict of interest? What is really interesting in this sector is people who are vulnerable rely on expertise. They go and seek expert advice to look after their financial future. We have not nailed down a proper definition of a conflict of interest in this sector in all areas. It is very clear in other more established professions what a conflict of interest is and that is why we have and have had for centuries professional and ethical obligations in this sector and it is why it is so important to make sure that we rid the financial advice sector of conflicted remuneration.

Labor supports this bill on the basis that it modestly improves the protections for consumers with respect to life insurance products. It is a modest improvement. It reduces the capacity—it does not remove it—for conflicted remuneration. It is a good start. It is an improved outcome for consumers, this legislation. While recognising the need to lower under insurance rates in this life insurance industry, Labor also acknowledges the concerns consumer groups have raised that the bill does not go far enough. The bill does not go far enough in the two-year claw-back period, which really should be a three-year claw-back period.

The bill does not address the broader issues though in the life insurance industry such as those raised this evening in respect of claims handling and outdated medical definitions, which have all come to light through the Comminsure scandal and through the many other recent inquiries. In fact, only a number of weeks back as part of the economics committee we had both ASIC and APRA come to speak to us about inquiries that they had been undertaking in the life insurance industry. Some of the things that came out of that were shocking.

It was not just that we had 30 per cent rates of declining claims being made on these insurance packages but the thing that actually really troubled me in all of that was that ASIC did not want to tell anyone who those life insurers were. The reason they did not want to tell anyone who those life insurers were was because they were concerned about the validity of the data that they had generated, because, when they went to speak to the life insurers, the life insurers could not give them concrete answers to the questions. The thing about that that really troubled me was people invest in a life insurance policy, a financial product, not for their future but for the future of their partner, for the future of their children. They make an investment over decades of premiums to make sure that when something bad happens to them, if they lose their life early, that their family will be looked after, that their home will not be taken away from them.

What came out of the inquiry by ASIC and APRA—and APRA acknowledged this in our hearing—was that the records are not kept properly by these life insurers. APRA agreed and APRA is concerned. What does that mean for the potential regulation and the capacity of these life insurers to ensure that they are able to make proper actuarial assessments to make sure that if claims are made on life insurance policies that they are able to pay out. So when people have made decades of investment, paying premiums to look after not them but to look after their children, they need to know that that life insurer is able to pay out. They fundamentally need to know that. It is not just a matter of: have I complied with these strange terms that no-one would ever have predicted? It is not just a matter of whether a life insurer is interpreting its policy in a capricious manner but, also, are those life insurers going to be there at the time when the people need to call on the policy?

APRA tried to assure us that they have no fundamental concerns with these life insurers but they were concerned about their capacity to do their job at best practice, to manage their book. They do not actually know the rates at which they decline, the claims that are made on their insurance policies. As I mentioned, there has been a series of inquiries and a series of reports into this industry. They have shown the fundamental need to reform the way that life insurance firms are regulated.

Steve Irons (Swan, Liberal Party) Share this | Link to this | Hansard source

Order! The member will be allowed to continue his contribution at a later date.