Alex Hawke (Mitchell, Liberal Party, Assistant Minister to the Treasurer) Share this | Hansard source

Today the Turnbull government is delivering on its commitment to address the misalignment of interests between consumers and financial firms in the life insurance sector as announced as part of its response to the financial system inquiry. There is no doubt that there is a clear need for changing the remuneration structures in the life insurance sector. We have the Australian Securities and Investments Commission report, the industry commissioned Trowbridge report and, of course, the Financial System Inquiry evidencing alarming levels of poor-quality advice and a strong link between high up-front commissions and poor consumer outcomes.

There is evidence not only that poor-quality advice is being provided but also that life insurance policies are lapsing at very high rates. It is imperative that these findings are addressed given life insurance is a key product through which consumers manage risk for themselves and their families. The government wants to ensure that remuneration structures in the life insurance advice industry support good-quality advice that prioritises the needs of consumers. Currently, up-front commission arrangements are the dominant remuneration arrangement, covering 82 per cent of advisers. It is not uncommon for up-front commission models to pay 110 per cent of a new business premium to an adviser, with an ongoing commission of around 10 per cent.

The Australian Securities and Investments Commission, otherwise known as ASIC, as part of its 2014 review into the life insurance advice sector found that, of the 202 files reviewed where the adviser was paid under an up-front commission model, the pass rate was 55 per cent, with a 45 per cent fail rate—that is, 45 per cent did not meet the legal minimum for the quality of advice. Where the adviser was paid under another commission structure, the pass rate was 93 per cent, with a seven per cent fail rate. These findings are alarming and a real-life case study into ASIC's review only sheds more light on the poor consumer outcomes.

This is the example of Michelle. Michelle is 50 years old, is married, works full time and has a salary of $56,800. With an existing annual premium for life insurance policies totalling $1,676, Michelle sought advice on how this life cover could be paid from her superannuation benefits and not from her personal cash flow. At the time, $1,174 of the premiums was being paid from her personal cash flow. The adviser in this instance recommended that Michelle increase her life cover, total and permanent disability cover and trauma cover, and also take out income protection cover. The new total annual premium was $10,772. Michelle ended up paying $5,353 from her superannuation benefits and the balance of $5,419 from her personal cash flow. This payment represents 9.5 per cent of Michelle's gross income—clearly a large financial commitment. In this case, there was an up-front commission representing 110 per cent of the premium, or $11,849. The advice clearly did not address Michelle's stated objective, which was to reduce the impact of her existing premium on her current personal cash flow.

This bill addresses the misaligned incentive that resulted in this egregious consumer outcome. Specifically, the changes in this bill will remove the current exemption in the Corporations Act from the ban on conflicted remuneration for commissions paid for selling certain life risk insurance products and enable ASIC to determine the acceptable benefits payable in relation to these products. An ASIC instrument will be able to set the maximum commission amount for certain life risk insurance products. Payments which are at or below these amounts will not be considered conflicted remuneration. The maximum permissible commissions will apply to the first year of the premium, known as the up-front commission, and for subsequent years, known as the ongoing commissions. This will not prevent insurers from paying level commissions with no maximum cap in place under this remuneration structure. Given the evidence of the strong link between the high up-front commissions and the poor consumer outcomes, these changes seek to better align firm incentives with consumer interests by capping the commissions provided in the first year of the premium, while still allowing for other remuneration structures in the sector.

Another major feature of this bill relates to the clawback arrangements. Clawback arrangements imposed by product issuers are designed to provide a disincentive to advisers to rewrite insurance cover for existing clients during the clawback period. However, clawback arrangements across the industry are not uniform and typically only apply to the first year of the premium. Reducing the incentive to churn or replace policy is a major objective of the government's reforms and clawback is essential to addressing the problem. Clawback will occur in the first two years of a policy where the product is cancelled or the sum insured decreases, subject to limited exemptions. ASIC will have the ability in its instrument to determine how much is required to be clawed back from life risk insurers each year. The stipulated clawback arrangements will only apply when an adviser is remunerated on an up-front commission basis.

The government of course recognises that the life insurance sector is vital for our community. Life insurance advisers help to provide important financial security to Australians and their families. To assist in this transition and to provide stability, advisers will have a three-year transition period to adjust their business models to the new regime, grandfathered arrangements for existing policies and a reduced two-year clawback period from the three-year clawback period which was originally proposed.

This bill is just one part of the government's package to help improve consumer outcomes in the sector. Later this year, ASIC will review statements of advice. The objective of the review will be to make disclosure simpler and more effective for consumers as well as assisting advisers to better make use of these documents. The industry is also creating a new industry code of practice which will include consideration of how approved product lists can be widened to broaden consumer choice. The government is also lifting the professional standards of financial advisers across the board. Raising standards will deliver better quality advice in this industry and more broadly in the financial services sector. The government will monitor the effects of these reforms and ASIC will conduct a review in 2018 to assess the quality of life insurance advice provided to consumers, in light of these reforms. If the review does not identify significant improvement, the government will move to mandate level commissions, as was recommended by the financial systems inquiry.

Access to appropriate life insurance products is in the long-term interests of Australian consumers. The bill and the government's package of reforms will fundamentally shift the industry to better align commercial incentives with the interests of consumers. This will benefit consumers through improved advice and better sustain industry into the future as a result of the improved consumer trust. I commend the bill to the House.

Question agreed to.

Bill read a second time.

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