When you buy a life insurance policy it can be your financial adviser rather than you who gains the biggest benefit, with advisers earning an upfront commission of as much as 130 per cent of the value of the first year’s premium.
That could be about to change with legislation before Parliament cutting that figure to 60 per cent and restricting trailing commissions to 20 per cent.
But don’t hold your breath waiting for the change because it won’t come in until January 1 2020, according to the legislation.
It looks set to become law because it will have the support of the ALP, a spokesman for the opposition’s financial services spokeswoman Katy Gallagher told The New Daily.
Not all are in favour, however. Greens treasury spokesman Peter Whish-Wilson said “we’re leaning towards supporting it. But we’re still having consultations and it will ultimately have to be decided in the party room”.
Consumer advocacy group CHOICE has mixed feelings. Campaign chief Erin Turner told The New Daily “it’s an important first step and a big change because currently commissions can be as high as 130 per cent. But we think no commissions are acceptable as research clearly shows they are harmful for consumers”.
Not only does the new legislation cut the maximum upfront commission to a limit of 60 per cent, it acts against one practice that has been used by some advisors to milk clients.
One intrinsic advantage
The legislation “will include clawback arrangement provisions under which part or all of the upfront commission will need to be repaid if the policy is cancelled or the premium reduces in the first two years”, Revenue and Financial Services Minister Kelly O’Dwyer told Parliament.
Clawback is important as some unscrupulous advisers have been churning, or advising clients to change insurers every two years so they can harvest another upfront commission, said Ian Fryer, researcher with superannuation consultancy Chant West.
“This (legislation) should reduce poor behaviour,” Mr Fryer said.
The size of the clawback will be determined by the Australian Securities and Investments Commission who will administer the law.
The pressure of the reforms could result in consumers paying lower premiums over time, Mr Fryer said.
Is superannuation affected?
Group life insurance that is bundled up in superannuation will not be affected by the changes. The FOFA (Future of Financial Advice) legislation in 2012 has already banned commissions on group policies.
But many people who have invested their super through ‘wraps’ (products that offer a range of investment options under one umbrella), under the direction of an adviser will now be covered. That’s because “wraps allow people to link to insurance options outside super”, Mr Fryer said.
“It’s not built into super so they can still pay commissions,” he said. Despite generally being more expensive, such arrangements in wrap products and self-managed super funds are quite common.
Commissions are banned from all MySuper default products.
CHOICE’s Ms Turner said anyone buying life insurance should look around to avoid big commissions even after the changes are introduced.
“An alternative is to look for a hybrid product where the commission is spread over the upfront payment and the trailing commission,” she said.
“You should also ask questions about the true cost of the product; what is the commission and how will the advisor get paid.”
The new legislation will apply to a range of life products. These include standard life insurance, total and permanent disability cover, trauma cover and income protection insurance.
ASIC will review the changes in 2021.
“If this review does not identify a significant improvement in product churn and the quality of advice, the government will move to mandate level commissions, as was recommended by the Financial System Inquiry,” Ms O’Dwyer said.
ASIC on Monday announced that it had barred former Westpac financial adviser Michael Mahoney from giving financial advice for four years for giving false and misleading advice to clients over insurance products.
Kelly O’Dwyer’s address to Parliament is below.