Consumer Action Law Centre, Financial Rights Legal Centre, CHOICE and Maurice Blackburn Lawyers have welcomed John Trowbridge’s final report into retail life insurance but believe that the industry has still failed to demonstrated that removing commission-based selling from the industry is not feasible.
The Trowbridge report, commissioned by the Association of Financial Advisers and the Financial Services Council, represents an acknowledgement that the life insurance advice industry is taking problems of conflicted remuneration and poor quality advice seriously. This report was prompted by ASIC’s Review of Retail Life Insurance Advice (released in October 2014) which found that 37 per cent of all life insurance advices reviewed failed to comply with the laws relating to appropriate advice and prioritising the needs of the client.
Mr Trowbridge’s proposed ‘five year rule’—which would prevent advisers from receiving an upfront payment for advising any client who has received advice within the last five years—is a particularly welcome response to the replacement policy or ‘churn’ problem in life insurance.
Replacing upfront commissions with a maximum upfront fee of $1200 and capped ongoing commissions is also an improvement on current practice, but signals a continued reluctance to accept that life insurance advice could function without conflicted remuneration. Consumer advocates believe that the industry has not demonstrated that other remuneration models—such as ‘fee for service’—are unworkable. If such fee structures are unfeasible, it is incumbent on the industry to provide evidence of this publicly so it can be scrutinised and tested. While Mr Trowbridge’s proposal is designed in part to encourage more advisers to introduce fees for service (for example, the unindexed upfront cap creates less reliance on conflicted remuneration), the ongoing use of commissions provides inappropriate incentives for advisers.
In any industry, commission-based sales create a lack of price transparency for consumers, which leads to lack of competitive pressure on prices. In life insurance advice, remuneration by commissions can also create a disincentive to provide quality advice. If advisers only get paid when they sell products bearing commissions, they are less likely to provide strategic advice, such as advice that a client should keep their current level of cover or advice that a client take up group life cover through superannuation.
Consumer advocates strongly support the recommendations to
- Establish a life insurance industry code of practice 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.
- Develop a best practice advice process supported by proven or well researched approaches to client engagement, education and advice delivery. Comprehensive consumer testing of ‘statements of advice’ will be necessary to ensure they are meaningful and useful for consumers.
 See page 7 of the report.