Financial advisers under pressure to justify commissions and value

Labor says the onus is on the life insurance sector to prove that the current system is working.

Royal Commissioner Kenneth Hayne said commissions on life insurance should be reduced and eventually scrapped following the review. Photo: Eddie Jim

Under-pressure life insurers and financial advisers must provide detailed arguments about why controversial commission payments should be retained and better explain their value to consumers, said Labor’s Matt Thistlethwaite.

The shadow assistant minister for financial services said there was value in the life insurance industry, but the onus was on the sector to prove to customers the current system was working.

He was speaking at the Risk Advice Summit in Sydney on Tuesday, where the industry is debating the outcomes of the Hayne royal commission and mooted reforms.

“The challenge for your industry is to explain that value to the broader population ... there is an opportunity for your industry to fill that void,” he told the conference, saying it was even more important, given an upcoming industry review by the corporate regulator and debate about scrapping commission payments.

Labor’s position prior to this year’s federal election was to allow the regulatory review to occur in 2021, but the party said there would have to be “pretty good reasons” for commissions to remain.

“The challenge for your industry is to explain why those commissions exist,” Mr Thistlethwaite told advisers on Tuesday. He also said there was scope for greater competition and it was up to the sector to make clear the differences in commissions paid for life insurance products versus those in other industries.

“You provide a valuable service, but I think there is probably an opportunity for more competition around that service,” Mr Thistlethwaite added.

He also reiterated that Labor was conducting a “full review” of all the policies it took to this year’s federal election, including its response to the Hayne royal commission.

“Everything is being reviewed, there is no policy that won’t be reviewed,” he said. “Where we have got good policy outcomes, we’ll work with the government.”

New reforms

Reforms were passed last week in the group life insurance market, albeit with exemptions for workers in higher risk industries.

They aim to protect superannuation accounts of workers aged under 25 and those with balances of less than $6000 from unnecessary erosion from life insurance fees. The overhaul makes cover opt-in rather than automatic for these low-balance savers.

Those reforms come as the Australian Securities & Investments Commission lays the groundwork to conduct a review of the life insurance sector and its pay models, which was ordered by the federal government to occur in 2021.

ASIC’s executive director of wealth management, Joanna Bird, said the regulator had started collecting the data for the 2021 review, with three sets of data collection occurring so far.

She outlined that ASIC had sought aggregate data from life insurance providers covering five different products across advised and direct insurance channels. That included sales data, the numbers of policies that had lapsed and commission clawbacks.

Random surveillance

ASIC will also undertake random surveillance of the industry to ensure it has a representative sample to compile the report.

“It’s too early for us to say what that data shows, so all we have so far is a baseline to the pre-reforms level data and the data on the first year of operations of the reforms when the commission cap was 80 per cent,” Ms Bird said at the conference.

As part of earlier industry reforms - the life insurance framework - commissions on life insurance stand at 70 per cent and that declines next year to 60 per cent.

The Hayne royal commission called for life insurance commission caps to fall to zero.

The new review needs to take into account whether the cap on commissions has contributed to underinsurance.

Advisers at the conference called on ASIC to tread cautiously on analysing lapse data on life insurance policies. Several said that could represent a customer moving to a better policy and not churn. They also argue that a fee for service charged to customers seeking life insurance could lead to thousands of dollars in charges being incurred and act as a deterrent to those seeking the cover.

ASIC plans to make its findings from the 2021 review public in the following year.

In his final report, Royal Commissioner Kenneth Hayne said commissions on life insurance should be reduced and eventually scrapped following the review.