Thursday, 9 February 2017
Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016; Second Reading
Australians use life insurance to financially protect themselves and those close to them. Many Australians take out life insurance for the peace of mind that, if the worst happens, there will at least be some level of financial protection for themselves and their families. Life insurance can provide essential funds and income in times when Australians are beset by illness, injury, disability or the death of a close family member.
Good financial advice can look at an individual's personal circumstances and help to make sure that they get a life insurance product that is suited to their needs. Good financial advice also ensures that Australians get good value for money when buying life insurance. Good financial advice helps to ensure that, if the worst happens, the customer receives the payments and income support that they expected when they took out the policy. However, for financial advice to deliver these outcomes, advisers must be motivated primarily by the interests of their clients and their clients need to be confident that this is the case.
Labor will support passage of the modest reforms to adviser remuneration in the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016. We do so because they represent steps to improve the quality of financial advice in relation to life insurance products. They represent steps to better align the interests of those providing financial advice with the interests of consumers. They also address concerns about advisers churning clients through products. These concerns are about advisers being driven by commissions to advise clients to replace their existing life insurance product with a new one.
Recent reviews have suggested a number of different ways in which conflicted remuneration should be limited in relation to life insurance products. ASIC's 2014 Review of retail life insurance advice report found that 37 per cent of consumers in its sample received life insurance advice that failed to comply with the law. It found that, where there was an upfront commission involved, 45 per cent of advice failed to comply with the law. This included the obligation for advisers to give priority to their client's interests over their own.
While we have noted the criticisms of some stakeholders about ASIC's sample, those findings are concerning. According to ASIC:
… many advisers giving post-FOFA advice may prioritise their own interests in earning commissions income ahead of the interests of the client in getting good quality advice.
The Financial System Inquiry also looked into life insurance. It made a number of recommendations in relation to life insurance, including the implementation of a level commission structure. Under a level commission structure, instead of being front loaded, the commission would be the same for each year that the policy continued.
The Life Insurance Advice Working Group also looked into the issue of commissions and life insurance, and it released the Trowbridge review in March 2015. The review noted the need to:
… balance improving the quality of advice and consumer understanding of remuneration arrangements, along with removing misaligned incentives, with sustaining a viable and competitive retail life insurance industry.
The Trowbridge review also recommended a move to level commissions. This would have been supplemented by an initial advice payment available at the first policy inception and then no more often than every five years.
The government's package stops short of the recommendations of the FSI and the Trowbridge review to remove upfront commissions. First, the package still allows for upfront commissions but caps them. Although the cap is for an instrument made by ASIC, the government has indicated that the cap 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 for upfront commissions. The package also caps ongoing commissions at 20 per cent.
Unfortunately, because the start date has been pushed back from 1 July 2016 to 1 January 2018, it appears that the 60 per cent cap will now not be reached until 2020. We consider this a long time for the introduction of a modest reform, particularly one that was first agreed to by industry in 2015. Labor supported this bill when it was first introduced into the House in February last year. We supported the bill's passage through the House on 3 March 2016. Although it grandfathered arrangements under existing enterprise agreements, the bill as initially introduced had a start date of 1 July 2016. Had the government decided to progress it, this bill could have been law well in advance of 1 July 2016.
In addition to the limits on the quantum of upfront commissions, the package introduces a two-year clawback of upfront commissions. This means that upfront commissions will have to paid back to the life insurer by the financial adviser in the event that the policy lapses. The repayment amount is for an instrument made by ASIC. However, the government has indicated that they expect the amounts to be as follows: if the policy lapses in the first year, the adviser will have to repay 100 per cent of the upfront commission; and if the policy lapses in the second year, they will have to repay 60 per cent. This is subject to exceptions set out in the exposure draft regulations—for example, if the policy lapses because it is paid out.
The legal means by which the bill imposes these limits on up-front commissions is by extending the ban on conflicted remuneration in the Corporations Act. A key tenet of the Future of Financial Advice reforms was the banning of many forms of conflicted remuneration for financial advisers. This included barring conflicted remuneration for life insurance policies held inside superannuation. This bill extends the ban on conflicted remuneration to life insurance products more broadly. It does so with an exception for circumstances where remuneration is within the caps allowed by ASIC's instrument. We welcome the implicit endorsement of the FoFA framework from those opposite that this bill represents.
While supporting this bill, we note the reservations that have been expressed by consumer groups that the bill does not go far enough. The clawback period in the bill is one year less than the three-year clawback period in the industry proposal announced by the government on 25 June 2015. We would not want to see financial advisers pressure customers to unnecessarily change their life insurance policy after two years as a result of these changes. The ASIC review of these reforms, now planned for 2021, should provide insight into the effect of the revised framework on churn. We also note the concerns of some financial advisers who feel, rightly or wrongly, that their voice has not been heard in the policy development process.
The ASIC review will provide an opportunity to check whether the bill is operating as intended, to further the interests of consumers. We should also keep in mind the importance of the administration of the clawback arrangements in the bill. These clawback arrangements are designed to reduce the incentives for advisers to unnecessarily move their clients to new policies. However, there is a side benefit to insurers of the clawback arrangements. The insurers get to take back the commissions that are paid to the financial advisers. We welcome the fact that the bill and exposure draft regulations provide detail of when payments should and should not be clawed back. For example, payments are not clawed back where a policy ends because a claim is made under it or because the insured person dies. However, it is important that these clawback arrangements are properly administered, and the 2021 review should look at this.
So that the allowable commissions can be worked out, the bill introduces a concept of policy cost for life insurance products. This is the cost on which commissions may be paid. The bill provides for regulations to prescribe amounts that are not to be included in the policy cost. The government has released exposure draft regulations that state that taxes on insurance are not included in the policy costs.
Some states and territories have abolished stamp duties on life insurance policies. This includes the ACT, which I can say is at the forefront of this tax reform. However, these taxes remain in some other jurisdictions. The former Labor spokesperson for financial services, the member for Rankin, raised this issue when he spoke on the bill earlier last year. Labor's position is that taxes on insurance, such as stamp duties, should not be included in the amount of the premium on which the calculations of the allowable commissions are based. Allowing commissions on taxes would set a concerning precedent.
Given that these reforms have been delayed to 2018, there is no longer a need for transitional arrangements while the industry updates its systems to accommodate the exclusion of tax from the amount on which the commission is based. The latest exposure draft regulations indicate that taxes on insurance are excluded from the policy cost on which the maximum allowable commissions are calculated. We are pleased that these draft regulations address this concern. We will be looking at the final regulations to make sure that this remains the case.
Having spoken about what the bill does, it is worth noting what the bill does not do. First of all, this bill does not guarantee that these new standards will be enforced. As mentioned earlier, ASIC's review of retail life insurance found a striking lack of compliance in this space. We support ASIC in the steps it takes to ensure that advisers abide by these laws.
Secondly, this bill does not address concerns that have been raised about the way parts of the life insurance industry handle claims. The bill does something in relation to conflicted remuneration for financial advisers selling life insurance products but it does not address the issue of conflicted remuneration for claims handlers. Claims handlers are charged with making fair decisions on the merits of life insurance claims. It was very concerning that ASIC's recent report, Life insurance claims: an industry review, showed that at least two life insurers are still paying remuneration that includes incentives in relation to claims handling.
Finally, the bill does not address the broader cultural and systemic issues that have come to light within the banking and financial services sector. This includes very serious concerns about the life insurance industry, such as high claims-denial rates, delays in processing claims and insurers hiding behind outdated medical definitions to deny claims. These are very serious issues for an industry that many Australians turn to in the darkest moments of their lives—an industry that they rely on in these moments to do the right thing.
So, we support these modest reforms in this bill in the hope that they will improve consumer confidence in the quality of financial advice on life insurance. However, they go only so far. We will not ignore the broader issues that have been raised in relation to the banking and financial services sector. A strong banking and financial services sector depends on Australians having confidence in that sector. That is why we need to get to the bottom of the culture and practices that have allowed repeated instances of misconduct to occur. This issue was illustrated recently when Small Business and Family Enterprise Ombudsman Kate Carnell said:
We've had a look at 17 inquiries over quite a number of years with the banks saying 'yeah, yeah, yeah, we're going to change' and then they don't. And then they find a way to have another inquiry and kick the can down the road to find another reason why they won't change.
Ms Carnell also said:
I think though what we've got is a banking industry in Australia, particularly the big four banks, that believe for whatever reason that they can continue with business as usual and they don't have to change.
Labor believes that the only investigation that can to get to the bottom of these issues is a royal commission, and that is why we will continue to argue for one. Labor believes that any systemic issues need to be ventilated and investigated in a thorough and transparent way. We need to give victims a chance to be heard, and we need to give Australians the confidence that these repeated scandals will not continue to occur.