Jim Chalmers (Rankin, Australian Labor Party, Shadow Parliamentary Secretary to the Leader of the Opposition) Share this | Link to this | Hansard source

Thank you for the opportunity to outline Labor's position on the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016. When it comes to financial advice, Labor's priority is a robust system that prioritises good consumer outcomes. That is what drove our final victory this week on the Future of Financial Advice legislation, and it is what drives our approach to this bill before us now. It has been pleasing to see the growing and now substantial recognition that there is much room for improvement in the life insurance industry. This has come from some very welcome attention from ASIC in its review, the review by John Trowbridge and the Financial System Inquiry, all three of which called for action on life insurance advice. This bill picks up some of the concerns in these reviews and begins—in a fairly modest way, it must be said—the task of reforming the remuneration model in the life insurance industry.

While Labor supports this legislation, we do have some issues and reservations with the package, which I will come to in a moment. We think that the ASIC review in 2018 will be an important opportunity to see what else might need to be done. Labor has a proud record when it comes to financial advice. The Future of Financial Advice reforms that I mentioned were the most substantial reforms of the financial services industry in a generation, improving outcomes for millions of consumers. FoFA banned many forms of conflicted remuneration for financial advisers, including life insurance policies held inside group life policies and super, but other life insurance policies remain exempt from the FoFA ban on conflicted remuneration. It has been argued that this loophole is leading to some questionable behaviour in the life insurance industry. The aim of this legislation is to improve outcomes for consumers while still allowing some commissions in recognition of the need to lower underinsurance rates in the life insurance industry. As a start, the bill will reduce the capacity for conflicted remuneration by reining in up-front commissions and removing some of the incentive for policy churn.

Currently, remuneration structures for life insurance advisers do provide an incentive to churn people through products, which can lead to poor advice and poor consumer outcomes. Around 82 per cent of the life insurance industry uses an up-front commission model and these up-front commissions for advisers are generally between 100 to 130 per cent of the product premium. APRA statistics have shown lapse rates for life insurance increased year-on-year every year since 2006, from around 12 per cent per annum to 17 per cent—evidence of growing product churn in the industry. These statistics are a cause for concern. That is one reason why the industry commissioned the Trowbridge review, and the financial system inquiry concluded that there was a clear need to change the way that life insurance advisers are remunerated. The Trowbridge review recommended a significant reduction in up-front premiums; the FSI recommended their complete abolition.

This bill makes some important changes to up-front commissions and introduces a retention period to try and minimise that churn that I mentioned. Up-front commissions on life insurance will be capped at 60 per cent, with ongoing commissions at 20 per cent. These caps on commissions are being phased in to minimise harm to advisers, from 80 per cent from 1 July 2016 to 70 per cent a year later and meeting that 60 per cent target in 2018. Advisers will also be required to repay premiums received in the case of a policy lapse in the first two years of a policy. If the policy lapses in the first year, the adviser must repay 100 per cent of the premium. If the policy lapses in the second year, the adviser must repay 60 per cent of the premium. This structure strikes some kind of balance between the interests of advisers and consumers by reducing the incentive to churn while ensuring some commission can be paid for the life of the product.

The changes to the commissions of life insurers introduced by this bill are a step towards improving consumer protection. But the Labor Party do have some concerns about aspects of the bill. Our priority is consumer protection and we think this bill could do better in some respects. One concern is with the clawback provisions in the final package. The clawback provisions are limited to the first two years of a life insurance policy. We do not want to see financial advisers pressure customers to unnecessarily change their life insurance policy after two years as a result of these changes. Another concern we have is around the calculation of the commission, particularly as it relates to stamp duty.

The exposure draft legislation also excluded stamp duty and government taxes from the calculation of permitted commissions payable to advisers. But this explicit exclusion was removed from the bill presented to parliament, leaving details of the calculation to the accompanying regulations which we still have not seen. This could become the first time that a commission may be paid on government taxes and stamp duty, which could be a very troubling thing. The government has indicated that this explicit exclusion was removed due to industry expressing concerns about the cost of systems change required to implement this exclusion. It is the practice of insurers not to separate out the cost of stamp duty and other government taxes in life insurance products. Labor would like to see the regulations which will accompany this bill either exclude stamp duty and government taxes from the calculation of commissions or to set out a timetable to achieving this outcome which would be acceptable to industry. The regulatory impact statement in the bill was revised upwards to $27.8 million from $18.2 million in the draft bill to reflect the additional costs of systems change, so we would like to see this borne out in practice.

Some consumer groups have suggested that these changes do not go far enough. Choice chief executive, Alan Kirkland, said:

Commission-driven churn is one of the major problems in this industry and we think that provisions to claw back commissions should extend for at least three years as originally proposed.

At this point, we cannot be certain that the new commission structure will be enough to stop the high levels of noncompliant advice in the industry, so we will monitor this aspect closely as well.

These concerns really underline the importance of the review of the industry by ASIC in 2018 that is required by this legislation. Labor are strongly of the view that if we do not see significant improvement the government needs to keep its word and move to legislate for a level commission structure. It is important to note that ASIC will commence its review of the reforms in the second half of 2018. But the transitional commission arrangements for the bill will only be in force from 1 July 2018. So the data ASIC relies on for its review will be largely based on transitional commission levels and might not give a sufficiently clear picture of the impact of the reforms. We want to be sure that the ASIC review is fulsome and carefully scrutinises the impact of this package. That is why—and I have said this in this chamber on previous occasions over and over again—if we want ASIC to do its job properly, we have to make sure that it is adequately resourced to do that job.

Despite these concerns, Labor do support the passage of this legislation that will make incremental improvement to the life insurance remuneration structures. We know that that view is not universal in the sector or in the community but we think all of these bills are, on-balance calls and we think, on balance, this bill is worth supporting. But we must use these changes as an opportunity to consider the industry more widely.

In its review of retail life insurance advice, ASIC found that 45 per cent of advice provided under an up-front commission model failed to comply with the law. This is a shocking and shameful statistic. We are fully supportive of ASIC holding advisers to the highest standards. People put a lot of trust in the system and they should be confident that they are not being taken advantage of. If further evidence emerges that advisers are doing the wrong thing by people—and we cannot rule that out—then we need to be ready to consider and respond to that behaviour as well.

So it is my view that although these changes are worthy of our support, we should consider them as a step in the right direction and not the arrival at a final destination. The ASIC review will help in that regard, as I have said. We strongly believe that the new framework must be monitored following implementation to establish whether it is working or not working or whether more needs to be done.

I would like to thank all the stakeholders for taking the time to share their thoughts on the bill with my office, including the Association of Financial Advisers, the Financial Services Council, John Trowbridge, the Financial Planning Association of Australia, the Independent Financial Advisers Association and individual advisers. I would also like to thank the Treasury for the briefing they provided me and my office.

Even though there are a variety of views among stakeholders on this package, we all want to see the life insurance industry working at its best and in the interests of middle Australia. Labor believes these reforms are not perfect but they will start to improve the industry. We will continue to seek ways to make the system work even better for consumers.

Debate adjourned.