David Coleman (Banks, Liberal Party) Share this | Hansard source

I am very pleased to have the opportunity to speak on this important bill, dealing as it does with an issue that has been contentious for some time, namely remuneration in the life insurance industry. The Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 amends the Corporations Act 2001 to better align the interests of financial advisers who sell life insurance products with those of the consumers to whom they sell those products. As you will be aware, Mr Acting Deputy Speaker, back in 2012 the FOFA reforms prohibited conflicted remuneration, but life insurance sold outside of superannuation was exempt from those changes at the time. This bill seeks to address that issue.

Currently, there are very few restrictions on how life insurance remuneration is put in place, and that does make life insurance somewhat different to the other areas within the broader wealth management area. There have been a number of reports that have looked into this issue: ASIC's review of retail life insurance advice, the industry-commissioned Trowbridge report and the Financial System Inquiry (FSI). Of course, in recent years one of the themes in the area of life insurance and financial advice more generally has been conflicted remuneration and regulation seeking to ensure that the interests of consumers are aligned with the interests of those who advise them.

Interestingly, when ASIC looked into this they found that in cases where there was a heavy bias in favour of up-front commissions, with advisers getting a large proportion of their remuneration in the very early stages of a life insurance policy, the clients tended to get a disproportionately low level of advice. So the high up-front commission was, in fact, correlated with a lower standard of advice. The basic principle that underpins this legislation is that the remuneration to advises should be run out over a number of years whilst the policyholder continues to hold that policy, rather than being perhaps more skewed to an up-front commission, which does not align the interests of the two parties. Advisers can currently receive up-front commissions of up to 130 per cent of the premium and trailing commissions of about 10 per cent, which can be very high. The ASIC report did find significant examples of churn as a consequence, where policies were perhaps held for a short period of time, nonetheless the adviser received the large commission.

Both the Trowbridge report and the FSI recommended some reform in this area and the industry itself, in late 2015, also agreed that reform was required, and this bill gives effect to that. One of the key principles here is that the commissions must be level across the years, so a consistent amount each year rather than having that bias towards up-front commissions, which is a disincentive to align the interests of both parties. Importantly, under these provisions, by 2020 the maximum level of commission that an adviser can receive as prescribed by ASIC is about 60 per cent of the total premium, which is about half of the current amounts. This is also subject to various penalties: up to $200,000 for individuals and $1 million for corporate entities if these arrangements are not followed. The bill also includes our clawback arrangements so, if a client does not actually stay with that policy for a substantial period of time, that some of that adviser remuneration is clawed back. Again, that provides the incentive to the adviser to ensure that they are providing products to consumers who actually want them and will use them and will keep them, as opposed to just a very hard sell to obtain an up-front commission. By reducing those up-front incentives, it is expected that the level of churn in the industry will decline and there will be better correlation between both parties.

In 2021, ASIC is going to have a review of these new arrangements and see how they are working in practice. If the changes are not working to the degree that the government is seeking, it would then move to mandate level commissions across the industry, and this bill puts in place the arrangements to enable the collection of information for that purpose. So basically from 1 July, up-front commissions starting at 80 per cent on 1 January 2018—a maximum of 80 per cent of a policy—will drop by 10 per cent per year to January 2020 until they reach 60 per cent. And ongoing commissions—trail commissions—will need to be a lower rate, of course, than up-front commissions and capped at 20 per cent from 1 January 2018. As I say, there are a number of clawback arrangements in place for situations where a client gets out of their policy soon after they are sold it. The government wants to ensure that, in effect, advisers pay a penalty and do not maintain that full up-front commission if it turns out that the client did not actually want to stick around with that policy for a reasonable period of time.

These are very important initiatives in this area of life insurance and there are aware, a number of other activities taking place in this area. Just recently, ASIC released its report into the life insurance industry and you will recall, Acting Deputy Speaker Kelly, that when the commissioner, Mr Medcraft, appeared before the House economics committee we discussed a range of the conclusions coming out of the review of insurance policies that were published by ASIC at that time. That was the first publication of this kind and it is intended in the future that, on an annual basis, there will be a full and transparent reporting of the performance of the life insurance industry, in order to give consumers a better understanding of how that industry is functioning and also identifying any particular issues of concern.

One of the things ASIC noted in its report was that the rates of declined claims were highest for total and permanent disability cover with about 16 per cent of claims denied, and a very large variation between insurers with one insurer having a denial rate as high as 37 per cent for TPD insurance. That obviously piqued ASIC's attention, as no doubt it did many other people, including myself. You would think, logically, that given many of the standards and definitions for insurance products are reasonably standard, you would not expect a wide variation in the level of claims being paid. But, in fact, what that report did reveal was a significant variation, and one of the best ways to address a problem is to shine a public light on it and that is what ASIC will be doing in the future with its annual report on the life insurance industry.

It was also notable in that process that ASIC did say there were some insurers where there were financial incentives for employees, within those insurers, based on the percentage of claims which were denied. Again, that is a troubling fact because you would be familiar with the term 'perverse incentive', and it is a fairly perverse incentive to say to a claims assessor, 'Effectively, you will get paid more the more claims you deny.' The role of a claims assessor should be to objectively and professionally assess a claim against the relevant criteria. An incentive of that nature is clearly something that raises concerns, and ASIC identified that in a couple of the insurers on which it reported. Annual reporting of the life insurance industry is a very strong initiative from this government. Of course, it was the Minister for Revenue and Financial Services, or Assistant Treasurer as she then was, who asked ASIC to report back, for the first time in quite a public fashion, about the performance of industry. They did that last month and they are going to be doing that every year. That is a very important reform and it is something that was done by this minister and this government.

There are a number of related issues that I want to touch on. Similarly to the life insurance industry, the wealth management industry has had some significant issues in recent times, with significant numbers of bad experiences for clients, and cases of customers not being treated well. It is my view, and the view of the house economics committee in its report last week, that something similar to the annual reporting regime of the life insurance industry should be put in place for the wealth management industry, so that consumers have the capacity to have a look, to see and to understand the relative performance of the different wealth management providers—and, if there are public complaints about those bodies, or if perhaps they breach their licence conditions, or if perhaps the executives of those entities fail in their respective responsibilities to their clients, it is entirely reasonable for consumers to want to know about that. That is what this annual reporting regime will do. It is something which I think is very consistent with the approach that the government is taking already in life insurance.

There is so much activity on a regulatory front in this area, Deputy Speaker, and you would be familiar with the actions of the government in relation to raising standards of financial advisers. When we entrust our savings with financial advisers, we want to make sure that those financial advisers have the right skills, the right aptitudes, the right ethical standards and the right education to do the right thing. Again, the government has moved very strongly in this area.

In fact, just last week, the minister introduced the Corporations Amendment (Professional Standards of Financial Advisers) Bill, and there are a number of very important areas in that bill. Again, it is all on the theme of professionalism, of transparency, of giving consumers the tools with which to make informed judgements about the people from whom they seek their financial advice. That bill includes compulsory education requirements for new and existing financial advisers: I think it is fair to say that those education standards, on occasion, can be lacking at present. That bill will address this. It also includes greater supervision requirements for new advisers, a code of ethics for the industry that everyone buys into, an exam that represents a common benchmark of professional performance, and also an ongoing professional development component—because people can entrust, literally, their entire life savings with financial advisers. And, just as when somebody visits a legal professional or a medical professional, they do so in the expectation that that person has the training and the skills and ascribes to a set of professional standards that will protect the individual in the event that there are problems. To be frank, that has not always existed in the financial advice industry. The overwhelming majority of financial advisers do the right thing. It is a very large and important industry, and I have some familiarity with it, having previously been on the board of Yellow Brick Road. But it is an area where there is an opportunity for the government to provide a clearer and better framework, with better standards and with the overarching goal of putting the power back into the hands of the client—the consumer—and ensuring that they have the appropriate protections. So, from January 2019, when these new measures come into place, there will be a whole range of requirements around advisers holding an appropriate degree, and the exam, from January 2024, will be an important new initiative to protect consumers in this most critical of industries.

So there are a wide range of initiatives in this area. The life insurance changes that we introduce today are a very important part of these initiatives. I commend this bill, the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, to the House.

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