Life insurance overdue for change
Consumer Action Law Centre says that proposed changes from the life insurance industry (welcomed by Assistant Treasurer Josh Frydenberg) to overhaul excessive commission structures and questionable advice are a step in the right direction, but don’t go far enough.
“While life insurance advisers are still getting commissions, regardless of the size of those commissions, advisers will not be truly independent,” says Gerard Brody, CEO of Consumer Action.
“This model perpetuates disincentives for advisers to provide strategic advice or advise consumers to take out group life cover through superannuation. In a commission based system, an adviser must work for free when giving that kind of advice”.
Consumer Action says the industry’s proposal should significantly reduce the incentive for advisers to “churn” or inappropriately offer replacement policies. The requirement for public reporting on policy replacement data should improve transparency about this problem.
Consumer Action also welcomes a further review to ensure consumers are protected. Brody notes “the proposed three-year review should be seen as an opportunity for further change – not mission accomplished. There’s much more work to do in changing the culture of a highly problematic industry.”
The Centre notes that implementation of the reforms remains unclear, including the compliance and enforcement model.
“Self-regulation will not deter behaviour in this industry. If we want effective change there needs to be independent oversight and enforcement” says Brody.
“It’s good to see the industry come to the plate with this proposal, but the only way to truly protect Australians from the kind of behaviour we’ve seen in the past is to build on their proposals and ensure robust and independent monitoring and enforcement.”
Consumer Action can provide further comment on specifics of the proposed changes including:
- Volume-based payments: the proposed ban on volume-based payments from 1 July 2016 is welcome, but the devil will be in the detail. We are interested to see more about how this will work.
- Vertical integration: it is not clear how the industry’s proposal will address the conflicts caused by vertical integration in the life insurance advice sector. Broadening Approved Product Lists would be a good start, but the industry proposal is almost silent on what will happen on this front.
- Clawbacks: The clawback proposal may still reward churn—an adviser can retain part of a commission if a policy is replaced in the second and third year after purchase. We support the 5-year model proposed by John Trowbridge which would prevent an adviser receiving any upfront payment for replacing a policy less than five years old.
- Fee-for-service advice: requiring life insurance companies to offer fee-for-service insurance products is welcome. The industry should be encouraged to move towards non-commission based selling arrangements.
- Code of conduct: this is strongly welcomed and should be developed through a consultative process that includes industry and consumers. To be effective, a code will need to cover the entire life insurance cycle, including advisers and life insurers.
Our previous submission to the Trowbridge report is available here.