Matt Keogh (Burt, Australian Labor Party) Share this | Link to this | Hansard source

Last night when I was speaking on this bill, I was drawing attention to the series of reports that have shown the need for reform of the way that life insurance advisers are remunerated. ASIC report 413, Review of retail life insurance advice, identified a strong connection between up-front commissions, policy lapse rates and poor consumer outcomes. ASIC's report found, amongst other things: 45 per cent of the advice provided under an up-front commission model failed to comply with the law; 82 per cent of industry uses an up-front commission model; and up-front commissions for advisers are generally between 100 and 130 per cent of the product premium. More recently, ASIC report 498, Life insurance claims: an industry review, found: that the rate of declined claims in the industry, as I mentioned last night, was the highest for TPD cover, with an average declined rate of 16 per cent, and for trauma cover, with an average declined rate of 14 per cent, and a considerable variation in declined claims among insurers, with TPD denial rates being as high as 37 per cent for some types of cover. I mean, just think about the effect on families and individuals who have suffered catastrophic injury preventing them from working, and over a third being denied—having their claim on their insurance, that they have been paying premiums on for years and years, declined. It also found that the most common types of life insurance disputes were about the evidence insurers require when assessing claims, including surveillance, and delays in claims handling. And this has got to be one of the most easy insurance types to assess; it is pretty clear when somebody dies.

There were higher claim denial rates in relation to insurance policies sold direct to consumers with no financial advice, compared to policies sold through advisers and group insurance policies. The industry-commissioned Trowbridge review recommended several reforms for adviser remuneration, including a significant reduction in up-front commissions. The Financial System Inquiry recommended the abolition of upfront commissions and a move to level commissions, where the commission remains the same year after year.

I am hopeful that the inquiry of the Joint Committee on Corporations and Financial Services into the insurance industry—and I am a member of that committee—will shine some light on these broader issues in the life insurance industry. The committee has been tasked with reporting on: the need for further reform; an assessment of the relative benefits and risks to consumers of the different elements of the life insurance market; whether entities are engaging in unethical practices to avoid meeting claims; the sales practices of life insurers and brokers; the effectiveness of internal dispute resolution in life insurance; the roles of ASIC and APRA in reform and oversight of this industry; and many related matters. This process will no doubt assist in drawing out more issues required to be addressed to fix life insurance, TPD and income protection insurance industry, as well as financial services and banking, generally, and related to them.

Let me be abundantly clear: only a royal commission will get to the bottom of the broader, systemic cultural issues in the banking and financial services sector.

Kelly O'Dwyer (Higgins, Liberal Party, Minister for Revenue and Financial Services) Share this | Link to this | Hansard source

Firstly, I would like to thank those members who have contributed to this debate. Today, the government is delivering on its commitment to better align the interests of consumers and financial firms in the life insurance sector, as announced as part of its response to the Financial System Inquiry.

There is a clear need for improvements to the remuneration structures in the life insurance sector. The Australian Securities and Investments Commission's 2014 report, the industry-commission Trowbridge report and, of course, the Financial System Inquiry all raised concerns around the link between upfront commissions, poor consumer outcomes and alarming levels of poor-quality advice. Given that life insurance is a key product through which consumers manage risk for themselves and for their families, it is important that these issues are addressed. The government wants a sustainable life insurance industry that provides good-quality advice and prioritises the needs of consumers.

Remuneration structures should not work against these important goals. The Australian Securities and Investments Commission, otherwise known as ASIC, as part of its 2014 review into the life insurance advice sector found that of the 202 files it reviewed where the adviser was paid under an upfront commission model the pass rate was 55 per cent, with a 45 per cent fail rate—that is, 45 per cent did not meet the legal minimum for the quality of financial advice. Where the adviser was paid under another commission structure, the pass rate was 93 per cent, with a seven per cent fail rate. This is particularly concerning as upfront commission arrangements are the dominant remuneration arrangement in the life insurance sector, covering 82 per cent of advisers. It is not uncommon for upfront commission models to pay 100 to 130 per cent of a new business premium to an adviser, along with ongoing commissions of around 10 per cent.

The changes in this bill will remove the current exemption in the Corporations Act from the ban on conflicted remuneration for commissions paid for selling life risk insurance products outside of superannuation. This bill will also enable ASIC to determine the acceptable benefits payable in relation to these products. An ASIC instrument will set the maximum commission amount for certain life risk insurance products. Payments that are equal to or below these amounts will not be considered conflicted remuneration. ASIC will have the ability to set maximum permissible upfront commissions and maximum permissible ongoing commissions. Given the evidence of the strong link between upfront commissions and poor consumer outcomes, these changes seek to better align firm incentives with consumer interests by capping commissions provided in the first year of premium while still allowing for other remuneration structures in the sector. Reflecting this, the bill does not prevent insurers from paying level commissions, with no maximum cap in place under this remuneration structure.

Another major feature of this bill relates to clawback arrangements. Existing clawback arrangements across the industry are not uniform and typically only apply in the first year of the premium. This piecemeal approach has not proven effective at limiting inappropriate product replacement, otherwise known as churn. Reducing policy churn is a major objective of the government's reforms. The clawback requirements introduced by this bill are essential to addressing this problem. Clawback will occur in the first two years of a policy where the product is cancelled or the sum insured decreases, subject to limited exemptions. ASIC will have the ability in its instrument to determine how much is required to be clawed back from life risk insurers each year. The clawback arrangements will only apply when an adviser is remunerated on an upfront commission basis.

The bill also enables regulations to prescribe circumstances in which benefits paid in relation to life insurance are conflicted remuneration. The intention of this regulation-making power is to ensure that all life insurance distribution channels are treated equally under the law and to maintain the integrity of the reforms by providing a flexible mechanism to address avoidance mechanisms in the future.

Of course, the government recognises that the life insurance sector is vital for our community, providing important financial security to Australians when they need it most. That is why the changes include a three-stage transition period to give advisers time to adjust their business models to the new regime. In addition, the clawback period has also been reduced to two years, down from the three-year clawback period originally proposed. The government has also amended the start date of the reforms to 1 January 2018 to ensure that all advisers are treated equally under the reform package, with no specific grandfathering arrangements for any particular group of advisers. This is, effectively, bringing forward the reforms because the reforms apply to all advisers sooner. The government acknowledges that some advisers may experience difficulty in adjusting, but the long-term benefits will make the change worthwhile. These reforms are necessary to make the industry more sustainable.

This bill is just one part of the government's broader work to help improve consumer outcomes in this sector. The government is also lifting the professional standards of financial advisers across the board. Raising standards will deliver better-quality advice in this industry and more broadly in the financial services sector.

The government will monitor the effect of these reforms. ASIC will conduct a review in 2021 to assess the quality of life insurance advice provided to consumers in light of the reforms. If the review does not identify significant improvement, the government will move to mandate level commissions, as was recommended by the financial system inquiry.

Access to appropriate life insurance products is in the long-term interests of Australian consumers. This bill, and the government's package of reforms, will fundamentally shift the industry to better align commercial incentives with the interests of consumers and make the life insurance industry more sustainable. I commend the bill to the House.

Question agreed to.

Bill read a second time.