Life insurance industry gets its FoFA moment

The Federal Government has announced the changes to life insurance remuneration arrangements that have been expected since the release of the Trowbridge report in March of this year. The release gives more detail about the Life Insurance Framework announced by the government in June.

The Assistant Treasurer, Kelly O’Dwyer MP, announced the measures in a recent media release. In summary:

• the final industry package will commence on 1 July 2016;
• changes will apply to personal and general advice, including direct sales;
• upfront commissions will be phased down to a maximum of 80 per cent from 1 July 2016, 70 per cent from 1 July 2017 and then 60 per cent from 1 July 2018, together with a maximum 20 per cent ongoing commission;
• a two year retention (‘clawback’) period will be introduced as follows:
  • in the first year of the policy, to 100 per cent of the commission on the first year’s premium; and
  • in the second year of the policy, to 60 per cent of the commission on the first year’s premium;

• advisers will be required to make more prominent disclosure about upfront commissions in advice they give clients; and
• industry will have responsibility for widening Approved Product Lists through the development of a new industry standard.

The reforms will be made through a combination of legislative changes and ASIC instruments. It is expected that the draft legislation and ASIC instruments will be released for consultation before the end of 2015. The ASIC instruments are likely to impose the monetary caps on upfront or renewal commissions recommended in the Trowbridge report.

The Government has committed to making no changes that ‘affect the industry’s ability to operate on a level commission or fee-for-service basis’. This suggests that the legislation will operate in the same manner as the ‘conflicted remuneration’ provisions introduced under the Future of Financial Advice (FOFA) reforms, such that issuers will be prohibited from paying commissions and advisers will be prohibited from receiving commissions except as permitted under the legislation, but there will be specific exemptions that apply to level commission arrangements and remuneration paid by the client for advice on a ‘fee-for-service’ basis.

It is unfortunate that the Government has determined to include commissions received for providing general advice about life insurance in the prohibition, given the application of the ‘conflicted remuneration’ provisions to general financial product advice has caused significant confusion in the industry since the FOFA provisions were introduced.

The detail of the reforms outlined by the Assistant Treasurer is as follows.

Adviser and licensee remuneration in relation to personal and general advice

• Maximum total upfront commission of 60 per cent of the premium (including base premium, frequency loading and the policy fee but excluding stamp duty) in the first year of the policy, from 1 July 2018. The commission cap is exclusive of GST.
• Maximum ongoing commission of 20 per cent of the premium in all subsequent years from 1 July 2016 (consistent with the Trowbridge recommendations).
• Two year retention (‘clawback’) period, to commence from 1 July 2016 to apply as follows:
  1. when a policy lapses or the premium decreases in the first year of the policy, to 100 per cent of the commission on the first year’s premium (the only exclusions to ‘lapse’ will be when a claim is made or suicide/self-harm); and
  2. when a policy lapses or the premium decreases in the second year of the policy, to 60 per cent of the commission on the first year’s premium.
• Ban on other volume-based payments from 1 July 2016, with appropriate grandfathering arrangements, consistent with the FOFA laws.
• Life insurance companies to offer fee-for-service insurance products to support advisers who wish to operate on a fee-for-service basis.

Transitional arrangements

• Maximum total upfront commission of 80 per cent of the premium in the first year of the policy from 1 July 2016.
• Maximum total upfront commission of 70 per cent of the premium in the first year of the policy from 1 July 2017.
• Maximum total upfront commission of 60 per cent of the premium in the first year of the policy from 1 July 2018.

Quality of advice and insurer practices

• Life Insurance Code of Conduct to be developed by the FSC by 1 July 2016. Similar to existing codes for Banking and General Insurance, the Code would set out best practice standards for insurers, including in relation to underwriting and claims management.
• Industry will have responsibility for widening Approved Product Lists through the development of a new industry standard. It is envisaged that this industry standard will be a joint effort of all industry participants, led by the FSC.

Better enforcement and monitoring

• Ongoing reporting by life insurance companies of policy replacement data to ASIC to commence from 1 July 2016.
• ASIC to complete a review of the impact of the life insurance reforms by the end of 2018.

Industry efficiency

• ASIC to commence a review of Statements of Advice from the second half of 2016, with a view to making disclosure simpler and more effective for consumers as well as assisting advisers to make better use of these documents. The review of Statements of Advice will also consider whether the disclosure of adviser remuneration could be more effective, including prominent upfront disclosure of commissions.
• The Government will amend the Corporations Act 2001 in order to facilitate the rationalisation of legacy products in the life insurance and managed investment sectors, with further analysis of the taxation implications explored in the context of the Government’s Taxation White Paper process.

Summary

The majority of life insurers had already started moving toward a level-commission remuneration structure in anticipation of upfront commissions being prohibited or significantly curtailed. The media release suggests that insurers and advisers will be able to grandfather existing arrangements, with the grandfathering date likely to be 30 June 2016. However, we will await the detail of the legislative changes when released by the Government later this year. In the meantime, advisers and insurers should learn from the FOFA experience and start documenting existing remuneration arrangements if they want to rely on the grandfathering provisions.