Bert Van Manen (Forde, Liberal Party) Share this | Hansard source

I rise to speak today on the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016. The changes outlined in this bill have been announced in response to the Trowbridge, ASIC and financial systems inquiry reports. This important bill amends the Corporations Act 2001 in an attempt to better align the interests of financial advisers who sell life insurance products with the interests of their clients. The changes outlined in the bill are anticipated to reduce or limit the incentive to churn clients through products.

In order to achieve this, the bill will allow ASIC, via a legislative instrument, to place a maximum level on the up-front commission that can be received by an adviser. The cap will apply from 1 July 2016, with an initial cap of 80 per cent, reducing to 70 per cent in 2017 and 60 per cent in 2018. Importantly, these caps will not apply to level commissions. Equally, ongoing commissions will also be capped at 20 per cent unless the commissions are being paid on a level basis.

In addition, the bill introduces extended clawback arrangements extending the period in which commissions can be clawed back by insurance companies when a policy lapses in the first two years. Importantly, the legislation does not define 'lapse'. The commission clawback will be 100 per cent of commission paid if cancelled in year 1 of the policy and 60 per cent if cancelled in year 2. It should be noted at the outset that commissions are a legitimate form of remuneration to compensate advisers for time taken in client meetings, product research, strategy development and meeting regulatory obligations and continuing professional development.

There are a number of other changes in this bill. However, I wish to focus on a couple of key areas. Firstly, I acknowledge the work that is being done by the Assistant Treasurer and the industry bodies—namely, the FSC, the FPA and the AFA—in reaching this agreement. However, it is fair to say that many experienced advisers in the industry do not believe that the issues raised in the report have been adequately dealt with. In this regard, they feel that their industry bodies have let them down. As one adviser has remarked, life insurance has been sold around the world for over 100 years in at least 40 countries without commission terms being centrally controlled by government.

There are two key issues for the industry to resolve. The first is the quality of advice. The second is ensuring the economic sustainability of the industry for all participants—clients, advisers and insurance companies. I would like to touch also on the responsibility of insurance companies. But firstly I would like to touch on the quality of advice. Everyone in the industry acknowledges that there are those advisers who do the wrong thing by their clients and consequently compromise client outcomes. In their submission to the Assistant Treasurer the CEO of Lifespan Financial Planning, Eugene Ardino, and the Executive Chairman, John Ardino, make the following point:

Upfront commissions are neither a necessary nor sufficient condition of poor advice as poor advice can occur with or without upfront commissions. While there may be a correlation between upfront commissions and poor advice the solution to addressing poor advice cannot be arrived at until insurers, licensees, regulators and consumer groups agree on the major casual factor without which poor advice cannot exist.

They go on to say that 'attacking remuneration won't solve the attitudinal problems of a sales culture'.

What is essential for good insurance advice is a move to an advisory and fiduciary culture which focuses on strategic life insurance advice on a basis that is as holistic as possible. Whilst this bill reduces the financial incentives it does not address the root causes of poor advice. I quote the Lifespan submission again:

Bad training, supervision, ethics and competency of low quality advisers and their freedom to operate without sanction because of poor licensee supervision and the relative absence of risk to their professional reputation.

The life insurance framework reforms are not a debate about churn or poor quality advice. Even ASIC acknowledged that there may only be a few bad apples and the culture and values of an institution are to blame for poor outcomes for some consumers. It is important to understand in this debate what 'churn' is and is not. Life insurance policy churn occurs when an adviser moves customers between different insurers without any benefit to the client. That, simply, is what churn is—no benefit to the client but a benefit to the adviser. The 2014 ASIC report failed to properly identify what percentage of policy lapses occurred as a result of this activity by advisers and consequently made the incorrect conclusion that an increase in lapse rates equated to an increased level of churn. This is at best sloppy analysis and at worst a deliberate attempt to misrepresent the data to obtain a predetermined outcome.

If, however, a client's life insurance policy is replaced because an adviser has found them a better policy or they needed to replace a policy due to unaffordable premium increases then arguably the adviser has met their 'best interest duty' to the client by broking the market to obtain a genuinely better deal for their client. This may occur if a person's circumstances have changed or, as ample evidence has shown, insurance companies have substantially increased premiums. For example, I have a list for a policy that was taken out in 2001 and is still current in 2016. The minimum increase over that period was 14 per cent, with a maximum increase of 21.6 per cent—that is, annual increase. The policy started at $872 a month, and it is now $2,052 a month. That is an example of where a policy is moved by the adviser to benefit the client by reducing the cost of holding their policy, and I believe they are acting in the best interest of the clients. This is not churn, it is ensuring the client's best interests are observed by the adviser.

As can be seen, there is a significant and important difference between lapses occurring as a result of churn and lapses occurring as a result of policy replacement. Consumers rely on the capacity of independent advisers to be aware of the opportunities in the market. Advisers are obliged by client pressure to seek alternatives. Insurers have increased premiums significantly over the past year—by up to 28 per cent—with CPI and age increases on top of that. Advisers are obliged by a 'best interest duty' to seek alternatives. Clients are demanding that advisers look at better options. Advisers work at saving the policy by negotiating reduced cover and premiums—especially if the client's needs and circumstances have changed, which can happen anytime. This reduction in premium is counted as a lapse. Yet business was saved, and the cost is incurred by the adviser assisting in this administration.

Asteron Life Executive Manager Mark Vilo acknowledged in riskinfo on 10 November 2015 that the top reason for policy lapses is price increases. Yet under the proposed remuneration structure the adviser is going to pay the price even though they have acted in the best interest of the client or the policy lapse is simply the result of a change in client circumstances. This in large part is my concern with this legislation. Advisers carry all the risk, and the insurance companies get off scot-free, whereas at least the current system has more balance.

The remuneration model proposed will result in a transfer of profits, business stability and longevity from independent financial advisers to the insurance companies, many of which are owned by the major banks. It will radically alter a market based system that has been in place for 100 years and replace it with a regulated system which favours the insurance companies over the independent financial advisers.

This brings me to the responsibility of the life insurance companies and the issues identified in their conduct in the report by reinsurer Munich Re. Ultimately, this is a debate about profitability and returns to the insurer shareholders, not about consumer benefits. These reforms cannot be rushed without understanding the significant collateral damage being done by insurance companies to IFAs. Consumers will, unfortunately, be the losers from these reforms if there is no obligation on insurers to deliver any benefit to the consumer.

The problem for the FSC, the representative of the insurance companies, is the legitimate replacement of policies and losing policies because the next insurer has a better offer—for example, 'market forces' of their own making. It is a vicious circle of product arms race. The product arms race manifests itself in a number of ways. Insurers encourage incoming new business, doing all they can to attract new business without considering long-term impact on their book of business. They certainly do not consider the impact on other insurance companies' books of business. Policies become unaffordable, with premiums getting higher and higher through constant increases, as I have touched on before.

So what do the insurance companies do? Rather than review their practices, they seek to convince a regulator to reduce commissions to the point where it is not a viable business option for unaligned adviser businesses to advise on insurance. To make sure it is unviable, they push all responsibility onto advisers by introducing an extended year clawback period. Insurers avoid issues named in the product arms race. This means insurers with a dependence on independent financial adviser networks will be disadvantaged but insurers with aligned distribution models—like the banks—will benefit.

What does this all potentially mean? It could drive consumers to the direct space where insurers can access for eligibility at claim time and thereby deny more claims. There is no adviser there to support and rally for the client at claim time. Premiums are higher in the direct mode, but consumers will not be able to tell. Customer needs will not be properly evaluated, but there is no obligation on that channel of distribution to do that anyway. It could result in more consumers seeking advice from vertically aligned advice space where the advisers can only recommend their own product or have limited product lists available. The winners as a result of this legislation are the insurers with aligned distribution and with a direct presence. The product manufacturers will retain profits to distribute to shareholders and have no obligation to pass these savings on to consumers.

However, there will be significant collateral damage. We risk losing our independent financial advisers as a result of this bill, exposing consumers to the risk of losing access to unbiased, broad-ranging market research, and they do not even know. The solution to this is not to reduce commission or increase clawback to align adviser behaviour but rather to focus on the true causes of poor advice.

In conclusion, to again quote the Lifespan submission:

LIF will simply result in the relatively few bad advisers being paid less for bad advice while the many good advisers will be made to suffer unnecessarily and be induced to exit.

I am pleased that this bill has been referred to the Senate Economics Legislation Committee for further consideration; however, it is disappointing to note that no public hearings are going to be held to give advisers the opportunity to voice the concerns they have that their industry bodies failed to properly represent.

It disappoints me to say that I cannot support this bill in its present form due to the significant damage it will inflict on independent financial advisers, in particular those who specialise in the provision of life insurance advice, and to the fact that it does not deliver any substantive consumer protections although that is a primary objective of the bill.

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