Finance Your Super ‘Dump insurance commissions’

‘Dump insurance commissions’

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Financial advisers must cease taking commissions from life insurers in exchange for channelling clients into their products, Industry Super Australia has argued.

The industry body argued that such practices “undermine the quality of advice” and must be banned outright.

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Last year the Australian Securities and Investment Commission (ASIC) found that more than a third of life insurance advice failed to comply with the law.

Despite this finding, a report commissioned by the financial advice industry – known as the Trowbridge Report – did not recommend banning commissions outright.

In a note to its industry members, ISA said this would “dangerously validate commissions that create an incentive for life insurance advisers to make a sale, rather than provide strategic advice”.

While commissions are banned on all other financial products, life insurance is exempt on the grounds that Australians are ‘under-insured’ – i.e. they don’t have enough private insurance cover, and are left dependent on welfare in the case of death or permanent disability of a family’s main breadwinner.

In theory, commissions shift the cost of advice from customer to insurance company, therefore making it more affordable. However, critics argue that the shift advisers’ focus away from their clients’ best interests, towards the products that pay the highest commissions.

Commissions also encourage a highly destructive practice known as ‘churning’, whereby the adviser regularly switches clients into new insurance products in order to win the up-front commission (often more than the annual premium).

ISA insisted there was no argument for allowing advisers to take commissions – also known as ‘conflicted remuneration’ – on any financial product.

“Conflicted remuneration, if allowed to remain in any guise, will continue to undermine the quality of advice and insurance outcomes for consumers. Up-front commissions (including capped up-front commissions), hybrid commissions and level commissions are still commissions – and will prevent consumers from accessing impartial and high quality financial advice on life insurance.

“ISA has continually rejected the argument that sales commissions lead to or are necessary for higher levels of insurance coverage, as there is no evidence to support this position.

“If the life insurance industry is serious about ensuring that consumers can access professional and unconflicted financial advice, they should invite the government to fix a date for the FoFA ban on all types of conflicted remuneration to apply to life insurance advice.”

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