Matt Thistlethwaite (Kingsford Smith, Australian Labor Party, Shadow Parliamentary Secretary for Foreign Affairs) Share this | Hansard source

I speak in support of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, which builds on the strong record that Labor had when we were in government of protecting consumers in the financial services and insurance industry in Australia. This bill builds on the Future of Financial Advice reforms that were put in place by the previous Labor government in the wake of many scandals in the financial planning and life insurance industries. They included Trio Capital, Storm Financial and, in recent years, Timbercorp. In only the past couple of years we have seen the CommInsure scandal, where literally thousands of consumers have lost money and have been worse off because of unscrupulous financial planners, advisers and people who were selling to consumers products that were not in their best interests. When Labor was in government, with the FOFA reforms we introduced a ban on conflicted remunerations. We introduced a best-interest duty to ensure that consumers were protected from unscrupulous financial planners and that the financial planner had a duty, by going through a checklist, to act in the best interests of the consumer. Of course, when Labor introduced these reforms, they were opposed by the coalition. Much the same as the previous speaker did, they said that they were interference within the market and that they would leave consumers worse off. What we have seen, of course, since that time is scandal after scandal in the financial services industry, highlighting the need for, if anything, stronger financial planning reforms and stronger reforms in the insurance industry—and this bill does that.

Life insurance policies, particularly those held through group life policies and superannuation, were covered by FOFA. However, other life insurance policies remain exempt from the FOFA ban on conflicted remuneration, and addressing that is the purpose of this bill. This bill reduces the capacity for conflicted remuneration in the life insurance industry, with the aim of improving outcomes for consumers while recognising the need to lower underinsurance rates in the life insurance industry. The main provisions of the bill, which is scheduled to commence on 1 January 2018, are the phasing down of up-front commissions to a maximum of 80 per cent from 1 January 2018, 70 per cent from 1 January 2019 and 60 per cent from 1 January 2020, together with a maximum 20 per cent ongoing commission; and a two-year retention, or clawback, period which requires advisers to repay premiums received in the case of policy lapse in the first two years of a policy as follows: 100 per cent of the premium in the first year of the policy and 60 per cent of the premium in the second year of the policy. The bill enables the Australian Securities and Investments Commission, ASIC, to make a legislative instrument to permit benefits in relation to life risk insurance products to be paid, provided certain requirements are met. These requirements relate to the quantum of allowable commissions and to clawback arrangements, where a certain portion of the up-front commission is paid back to the life insurer by the financial adviser in the event that the life insurance policy is cancelled or the premium is reduced. This bill introduces a ban on volume based payments in life risk products and includes transitional, or grandfathering, arrangements in the Corporations Act. The bill gives ASIC the power to create an instrument that sets the maximum permissible up-front and ongoing commissions. There will be no ban on level commissions—commissions where the same commission is paid for each year of a policy—nor will there be a ban on fee-for-service arrangements. ASIC will be required to conduct a review of the reforms in 2021.

Underinsurance in Australia is, sadly, not a new concept. In 2013 underinsurance provider TAL—sorry, insurance provider TAL. Well, they are underinsuring; I think everyone is underinsuring! TAL found that only 30 to 37 per cent of Australians aged 18 to 69 held some form of life insurance. Only 11 to 18 per cent held disability cover, income protection insurance, or critical illness and trauma cover. In 2014, KPMG released a research project into underinsurance in Australia for people aged 18 to 64. The report found that around 35 per cent of people in Australia have no disability insurance at all. Of the age group 45 to 64, nearly 77 per cent were found to be underinsured. In October this year, CANSTAR noted that Australians are underinsured to the value of about $1.8 billion.

Australia needs a system that promotes insurance take-up by consumers, and the best way to promote insurance take-up, particularly life, disability and income protection insurance, is to ensure that Australians have confidence in the system and in those who are selling those products into the Australian market. That is the aim of this bill—to provide reassurance and confidence that people cannot be ripped off, if you like, by products where commissions and other payments are being hidden from the public by those who are receiving them.

Labor supports this bill on the basis that it modestly improves protections for consumers with respect to life insurance products; however, more work is needed to be done. There is much more work that needs to be done in terms of protecting consumers. This bill does not address broader issues in the life insurance industry, such as issues with claims handling and outdated medical definitions which have come to light in recent months through the banking inquiry and the CommInsure scandal. However, if we are going to be serious about tackling some of the problems that exist in the insurance industry then only a royal commission will get to the bottom of exactly what is going on in banking and financial services.

A series of reports have shown the need for reform in the way that insurance advisers are remunerated. ASIC Report 413 Review of retail life insurance advice identified a strong connection with upfront commissions, policy lapse rates and poor customer outcomes. The factors ASIC identified that affected the quality of advice were: adviser incentives, inappropriate scaling of advice, a lack of strategic life insurance advice, weak rationales for product replacement advice and failure to consider the relationship between life insurance and superannuation. After reviewing over 200 files, ASIC found that the way advisers were paid had an influence on the likelihood of their clients receiving advice that did not comply with the law.

ASIC's report found, among other things, that 45 per cent of advice provided under an upfront commission model failed to comply with the law, that 82 per cent of industry uses an upfront commission model and that upfront commissions for advisers are generally between 100 to 130 per cent of the product premium. The industry-commissioned Trowbridge Review recommended several reforms to adviser remuneration, including a significant reduction in upfront fees. Finally, the Financial System Inquiry recommended the abolition of upfront commissions and a move to level commissions.

There has been a series of these reports, a series of these reviews, in the wake of all these scandals that we have seen in the industry. I have to comment on the previous speaker's comments that these will all be solved by a banking tribunal. We all know that is complete and utter rubbish. A tribunal will not have the power and will not have the expertise to get to the bottom of what exactly is going on in this industry. A tribunal has been panned by consumer advocacy groups, and all of the banks have come out over the course of the last couple of days saying that they do not support a tribunal. The government cannot explain how a tribunal will work; how people will be appointed to it—whether or not it will be in the form of a membership corporation or if it will be a judicial body established by statute with power to not only make decisions but enforce those decisions; and what an appeal mechanism will look like.

Also, we have seen through the scandals that have come out in this industry that a tribunal is simply not good enough. The previous speaker made the comments that, essentially, what has gone on in the CommInsure scandal and other insurance providers with product problems with inappropriate products being sold and with medical definitions being changed are essentially just commercial disputes. They are just commercial disputes between an insurance company and the people who happen to take out those policies and did not like the way the insurance company looked at the definition and made a decision on their claim. Well, tell that to the thousands of people who have now had their insurance claims denied because some insurers use outdated medical definitions from the 1940s to basically deny claims.

The whistle was blown on this by medical experts who worked for these insurance companies—doctors who have an oath to provide the right advice to clients and to patients. They got uncomfortable about the fact that the definitions they were being asked to change reports on and to deny claims on were not up to date. The definition of 'heart attack' and the definition of 'rheumatoid arthritis' simply did not meet modern medical practices, and several of these doctors blew the whistle on what was going on, particularly at the Commonwealth Bank. They took their complaints to their immediate managers and they were ignored. They took their complaints to their divisional heads and they were ignored. It took Dr Benjamin Koh at CommInsure taking the issue to an independent director on the Commonwealth Bank board before action was taken and a review was conducted.

In many of these cases, it takes the media getting involved before the banks and insurance companies take action. That is not simply a commercial dispute between an insurance company and its customers; it is the deep-seated problems with this industry that only a royal commission will be able to get to the bottom of. I do not know why this government is siding with the banks on this. I do not know why this government is doing the bidding of the banks and ignoring the pleas of the Australian people who are fed up with, and sick and tired of, the actions of banks and who want a royal commission into this industry. It is only Labor that supports a royal commission. It is only Labor that can deliver a royal commission into the banking industry.

In terms of the ASIC review into the insurance industry, they will complete their reforms in 2021. The data that ASIC relies on for its reviews will be largely based on transitional commission levels and may not necessarily give a clear picture on the impact of these reforms.

We should note the continuing uncertainty around ASIC's resourcing as a result of the user-pays ASIC funding model and recent budget cuts, as it relates to ASIC's ability to do this review. This is a big issue and something that was identified by ASIC representatives when they appeared most recently before the House of Representatives economics committee. They highlighted the fact that the government is giving them all these additional reviews to undertake, all this additional work, but no additional funding to perform those tasks. You cannot expect a regulator—and a properly well-informed regulator—to do its job if it does not have the budget and staff to complete that work.

Our No. 1 priority on this side of the chamber is to ensure that customers are protected and that when they are seeking financial and insurance advice they can have every confidence that their planner and those offering that advice are acting in accordance with their best interests. That is the basis on which we implemented the FoFA reforms and that is the basis on which we are supporting this modest reform here today. But we do need to go further: we need a royal commission into banking and insurance in this country.

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