Financial advisers welcome O’Dwyer’s life insurance reforms

The government’s revised life insurance remuneration reforms will clamp down on both advised and direct sales.

ASIC deputy Peter Kell wants insurers to ‘lift their game’. Picture: Jane Dempster

The government’s revised life insurance remuneration reforms will clamp down on both advised and direct sales of life insurance products, representing a win for the Association of Financial Advisers that lobbied for laws treating advisers on the same level as direct distribution channels, such as comparison websites.

The main change in the reforms, which support the bill introduced last week by Minister for Financial Services Kelly O’Dwyer and stagger maximum commissions downwards to 60 per cent by 2020, was to extend the law to cover direct life insurance, which was left out of the original draft regulations.

Direct life insurance is the most expensive channel for life insurance products and usually sold through television advertising or comparison sites, where it is known as retail life insurance. The reforms also reduce maximum ongoing commissions to 20 per cent.

It came as the Australian Securities & Investments Commission deputy chairman Peter Kell signalled the regulator’s interest in ending conflicted remuneration payments in the life insurance industry. Before a Senate Estimates Committee, Mr Kell said he also wanted to strengthen the interdepartmental disputes-handling processes to help insurers “lift their game”.

Mr Kell defended last week’s publication of a scathing report on the life insurance industry that singled out an insurer for rejecting 37 per cent of total and permanent disability claims, later revealed by The Australian to be Westpac subsidiary BT Financial Group.

“Our aim was to start the process of fixing up this industry as fast as possible,” Mr Kell told the Senate committee. “We could have spent another eight, nine or 12 months sorting out all the data issues but we were keen to start the process of law reform, of publishing data,” he said.

Mr Kell added that the Financial Services Council’s new life insurance code of practice banned conflicted remuneration practices and ASIC was interested in asking companies: “Are you stopping those payments right now?”

ASIC executive leader Michael Saadat said although life insurance complaints were lower in frequency compared with travel, home and contents insurance, the disputes were of a higher importance.

Mr Kell said ASIC was keen on an automatic trigger that took life insurance disputes to the Financial Services Ombudsman after a certain amount of time to end “unreasonable delays”. This would “provide a pretty direct incentive for insurers to lift their game”, he said.

Sally Loane, chief executive of the Financial Services Council, which represents direct insurers, said it was important that quality financial advice was not adversely affected by remuneration structures.

“To this end we welcome the corporations amendment,” Ms Loane said.

AFA general manager of policy Samantha Clarke said the group was pleased with the reforms. “The AFA has been having many constructive conversations with the government around making sure the reforms would apply fairly across all types of advisers as well as all types of channels,” Ms Clarke said.

“It’s to make sure there’s no advantage or disadvantage to any different form or channel of life insurance,” she said.

Anthony Brown, chief executive of unlisted insurer Noble­Oak, which refuses to pay high upfront commissions and only distributes through fee-for-service financial advisers, said he was a “big supporter” of the revised regulations.

“Both direct and advised channels need to be equally responsible for providing value for money to their customers and clients,” Mr Brown said.

“There is no doubt that the high upfront commission model — where 110 to 130 per cent of the first-year premium is paid to the adviser — can lead to poorer quality advice and possibly a lower focus on client needs,” he said, adding: “Bring on the reforms.”