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Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016



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ISSN 1328-8091

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BILLS DIGEST NO. 36, 2016-17 9 NOVEMBER 2016

Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 Kai Swoboda and Tarek Dale Economics Section This Bills Digest updates an earlier version dated 31 March 2016.

Contents

History of the Bill ................................................................. 3

Purpose of the Bill ............................................................... 3

Background ......................................................................... 3

What is conflicted remuneration? ........................................... 3

Life insurance industry, products and remuneration arrangements .......................................................................... 3

Figure 1: Life insurance remuneration models, 2011-2013 averages ............................................................. 4

Brief history of the future of financial advice changes ........... 4

Policy development ............................................................. 6

Industry attempts at self-regulation........................................ 6

ASIC review .............................................................................. 7

Trowbridge Review .................................................................. 9

Interim report ........................................................................ 9

Final report ............................................................................ 9

Financial System Inquiry ........................................................ 10

Interim report ...................................................................... 10

Final report .......................................................................... 10

Government response to Financial System Inquiry ............ 11

Final policy decision and draft legislation ............................. 11

Broader policy considerations ............................................. 12

Developments since the earlier Bill .................................... 12

CommInsure Scandal ............................................................. 12

Life insurance code of practice .............................................. 13

Date introduced: 12 October 2016

House: House of Representatives

Portfolio: Treasury

Commencement: Sections 1-3 on Royal Assent; Schedule 1 on 1 January 2018.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at

November 2016.

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Parliamentary Joint Committee on Corporations and Financial Services ................................................................... 13

Committee consideration .................................................. 13

Senate Economics Legislation Committee............................. 13

Senate Standing Committee for the Scrutiny of Bills ............ 14

Statement of Compatibility with Human Rights .................. 14

Policy position of non-government parties/independents ... 14

Position of major interest groups ....................................... 15

Financial implications ........................................................ 16

Key issues and provisions................................................... 16

Delayed start date ................................................................. 16

Why regulate life insurance remuneration arrangements? ...................................................................... 16

Consumer interests ............................................................. 17

Form of regulation ............................................................... 17

Facilitative provisions ............................................................ 18

Allowable commissions and clawbacks ............................... 18

Benefit ratio requirements ................................................ 19

Clawback requirements .................................................... 19

Transitional arrangements .................................................. 19

2021 Review ........................................................................ 20

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History of the Bill A similar (but not identical) version of this Bill was introduced in the 44th Parliament. The Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 (the earlier Bill) was introduced on 11 February 2016, and progressed to the Senate, but lapsed at the prorogation of the 44th Parliament.1 The differences in the two versions of the Bill are outlined below.

Purpose of the Bill The purpose of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 (the Bill) is to amend the Corporations Act 2001 to:

• remove the current exemption from the ban on conflicted remuneration for benefits paid in relation to certain life risk insurance products and

• enable 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 that certain requirements are met.

Background What is conflicted remuneration? Division 4 in Part 7.7A of the Corporations Act sets out a general ban on remuneration arrangements for financial advisors on the sale of financial advice and financial products to certain consumers. The rationale for the ban is that, because of the nature of the benefit or the circumstances in which it is given, the remuneration arrangements could reasonably be expected to influence the choice of product or advice given.2 The general aim of these provisions—which were part of the ‘Future of Financial Advice’ (FOFA) arrangements implemented by the Gillard Government—was to more closely align the interests of those who provide financial product advice to retail clients with the interests of their clients, and improve the quality of advice these clients receive.3

Section 963B of the Corporations Act provides some exemptions from the general ban on conflicted remuneration in certain circumstances. These exemptions include, amongst other things, where the benefit relates solely to a general insurance product4 or where the benefit relates solely to a life risk insurance product, other than a group life policy for members of a superannuation entity or default superannuation fund.5

The exemption for life insurance outside of superannuation, which was included as part of the FOFA changes, was based on concerns about affordability of life insurance and the potential for under-insurance.6

Life insurance industry, products and remuneration arrangements As at December 2015 there were 28 registered life insurers operating in Australia,7 and the sector had net premium income in the 2015-16 financial year of $56.7 billion.8

Life insurance generally covers a range of insurance products including:

• life cover—also known as term life insurance or death cover, pays a set amount of money when the insured person dies

• total and permanent disability (TPD) cover—covers the costs of rehabilitation, debt repayments and the future cost of living if the insured person is totally and permanently disabled. TPD cover is often bundled together with life cover

1. Parliament of Australia, ‘Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 homepage’, Australian Parliament website. 2. Australian Securities and Investments Commission (ASIC), Conflicted remuneration, regulatory guide, 246, 4 March 2013, p. 6. 3. Ibid., p. 5.

4. Corporations Act 2001, paragraph 963B(1)(a). 5. Corporations Act 2001, paragraph 963B(1)(b). 6. J Trowbridge, Interim report on retail life insurance advice, Life Insurance and Advice Working Group, Financial Services Council, 17 December 2014, p. 7.

7. Australian Prudential Regulation Authority (APRA), Life Insurance institution-level statistics: December 2015, APRA, Sydney, 8 June 2016, p. 21. 8. APRA, Quarterly life insurance performance: statistics: June 2016, APRA, Sydney, 16 August 2016, p. 8.

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• trauma cover—provides cover in the event of a diagnosis of a specified illness or injury. These policies include the major illnesses or injuries that will make a significant impact on a person's life, such as cancer or a stroke. It is also referred to as ‘critical illness’ cover or ‘recovery’ insurance and

• income protection—replaces the income lost through an inability to work due to injury or sickness.9

Consumers generally purchase life insurance in one of three ways: through an advice provider (adviser); directly from an insurer; or through their superannuation fund and the group life cover offered by the fund.10

As at 30 June 2013 the Australian Securities and Investments Commission (ASIC) found that, for 12 life insurers participating in an ASIC survey, there were 2.6 million policies in force that were purchased through an advice provider (adviser).11 At this time, life only and income protection policies were the most common policies in force, comprising 32 per cent and 21 per cent of the total policies in force.12

For life insurance distributed under personal advice models, advisers are typically paid under commission arrangements. In 2014 ASIC noted that upfront commission models—in which advisers were paid an amount upon the sale of a new premium—were the dominant remuneration arrangement by a significant margin, with 82 per cent of the remuneration in the industry in 2013 derived from these amounts (Figure 1).

Figure 1: Life insurance remuneration models, 2011-2013 averages

Source: Australian Securities and Investments Commission (ASIC), Review of retail life insurance advice, report, 413, 9 October 2014, pp. 26-27.

Brief history of the future of financial advice changes The FOFA reforms were a package of amendments to change how financial advice is delivered to clients including:

• how financial advisers behave in relation to providing advice

• how clients are charged for this advice and

• the disclosure of fees to clients.

The FOFA reforms constituted the Rudd and Gillard Governments’ response to the 2009 report by the Parliamentary Joint Committee on Corporations and Financial Services of its Inquiry into Financial Products and

9. ASIC, ‘Life insurance: be prepared for life’s emergencies’, MoneySmart website, last updated 1 November 2016. 10. ASIC, Review of retail life insurance advice, report, 413, 9 October 2014, p. 4. 11. Ibid., p. 18. 12. Ibid., p. 19.

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Services (PJC report).13 The impetus for the PJC inquiry was a number of significant corporate collapses, including Storm Financial and Opes Prime.14

The FOFA reforms were introduced into the Parliament in late 2011 and implemented by two key pieces of legislation:

• the Corporations Amendment (Future of Financial Advice) Act 2012 which:

enhanced the requirement for disclosure of fees and services associated with ongoing fees15 and

enhanced the ability of ASIC to supervise the financial services industry, through changes to its licensing and banning powers for financial advisers16 and

• the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 which

required those persons who are providing personal financial advice to retail clients to act in the best interests of their clients, and to give priority to their clients’ interests17

imposed a prospective ban on conflicted remuneration structures18

applied existing regulatory mechanisms under the Corporations Act more directly to individual advisers as well as to licensees.19

The implementation date for most of the FOFA reforms was originally 1 July 2012. However, Government amendments during the passage of the legislation provided that the provisions would be voluntary until 1 July 2013, after which time compliance with the relevant requirements was mandatory.20

Upon coming to office, the Abbott Government sought to make a number of changes to some aspects of the FOFA arrangements through the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014, which was introduced in the House of Representatives on 19 March 2014.21 Some of the proposed changes included:

• removing the need for clients to renew their ongoing fee arrangement with their adviser every two years (also known as the ‘opt-in’ requirement)

• making the requirement for advisers to provide a fee disclosure statement only applicable to clients who entered into their arrangement after 1 July 2013

• removing the ‘catch-all’ provision, from the list of steps an advice provider may take in order to satisfy the best interests obligation

• better facilitating the provision of scaled advice and

• providing a targeted exemption for general advice from the ban on conflicted remuneration in certain circumstances.22

Some of these proposals were controversial.

While the Bill was before the Parliament, the Government announced that it would implement some of the changes by regulation.23 These amendments were implemented through the Corporations Amendment

13. Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into financial products and services in Australia, Parliamentary Joint Committee on Corporations and Financial Services, Canberra, November 2009. This inquiry is sometimes referred to as the ‘Ripoll Inquiry’ after its chair, Bernie Ripoll.

14. Ibid., p. vii. 15. Corporations Act, section 962G. 16. These changes included various amendments to the Corporations Act in relation to ASIC’s powers to make decisions to grant, suspend or cancel a licence and bans (including amendments to sections 913B, 915C and 920A).

17. Corporations Act, section 961B. 18. Corporations Act, Divisions 4 and 5 of Part 7.7A. 19. Corporations Act, section 961. 20. The Treasury, ‘Implementation’, Future of Financial Advice website; B Shorten (Minister for Financial Services and Superannuation),

Government’s financial advice reforms pass the parliament, media release, 20 June 2012. 21. Parliament of Australia, ‘Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 homepage’, Australian Parliament website. 22. Explanatory Memorandum, Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014, p. 4.

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(Streamlining Future of Financial Advice) Regulation 2014, which commenced on 1 July 2014.24 On 19 November 2014, the Regulation was disallowed by the Senate.25

The Government then remade a number of time-sensitive elements of the disallowed Regulation. These changes were implemented through the Corporations Amendment (Revising Future of Financial Advice) Regulation 2014 (dated 11 December 2014) and the Corporations Amendment (Financial Advice) Regulation 2015 (dated 25 June 2015).26 The Regulations commenced on 16 December 2014 and 1 July 2015 respectively.

The Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014, including amendments made by the Government, was passed by the House of Representatives on 28 August 2014. The Bill, with further Government amendments, was passed by the Senate on 24 November 2015 and agreed to by the House of Representatives on 1 March 2016.27 The key changes that were proposed in the Bill as introduced but not included in the Bill as finally passed by the Parliament were:

• changes to the Statements of Advice requirements

• repeal of the requirement that licensees send fee disclosure statements to pre-1 July 2013 clients

• repeal of the opt-in requirement for continuing an ongoing fee arrangement between a fee recipient and a client

• changes to the best interests duty and scaled advice and

• the general advice exemption from conflicted remuneration.28

Policy development The arrangements proposed by the Bill are a response to concerns held over a number of years about remuneration arrangements in the life insurance industry. These concerns were considered as part of the FOFA reform process.

While self-regulation was first proposed by the financial services industry in 2011, the idea did not receive universal industry support. This then led to a life insurance industry-commissioned review, which overlapped with the Government’s financial system review and ASIC research.

Further consultation by the Government after these processes concluded then contributed to the design of the measures included in the Bill.

Industry attempts at self-regulation At the same time as the development of the FOFA package of measures in 2010 and 2011, the financial services industry was examining remuneration arrangements in life insurance to address issues associated with ‘churning’—whereby consumers with an existing life insurance policy are sold a new policy by a financial adviser that has no net benefit for the consumer.29 While churn can be a measure of competition within an industry and indicate that choice is exercised by consumers, relatively high levels of churn in some industries may also be associated with concerns about inappropriate marketing strategies or customer dissatisfaction with a supplier.

In August 2011, the Financial Services Council (FSC) recognised that churning impacted on both the quality and cost of life insurance products for consumers and on the profitability of the industry, with the CEO of the FSC noting:

23. M Cormann (Acting Assistant Treasurer), The way forward on financial advice laws, media release, 20 June 2014. 24. Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014. 25. Australia, Senate, Journals, 66, 2013-14, 19 November 2014, pp. 1805-1806. 26. Corporations Amendment (Revising Future of Financial Advice) Regulation 2014; Corporations Amendment (Financial Advice) Regulation

2015.

27. Parliament of Australia, ‘Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 homepage’, Australian Parliament website. Due to its delayed passage, the Bill as passed was titled the Corporations Amendment (Financial Advice Measures) Act 2016. 28. Supplementary Explanatory Memorandum, Corporations Amendment (Streamlining of Future Financial Advice Bill) 2014, p. 4. 29. Financial Services Council (FSC), Churning in life insurance, media release, 4 August 2011.

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Advisers that engage in churning do so to access the upfront commission on the sale, in the knowledge that the new policy provides essentially equivalent cover and benefits for the client, to the policy that has been replaced.

The practice also creates cost pressures for life insurance premiums that are simply wasteful and unnecessary.

This practice is not in the interests of consumers and the FSC has taken the clear view that it is inconsistent with the statutory requirement for financial advisers to act in their clients’ best interests.

While this practice is not widespread, it is significant enough an issue to warrant industry action. 30

At this time, the FSC proposed the development of a voluntary industry standard (which would apply to members of the FSC) to address the practice of ‘churning’.31 The FSC proposal included:

• the removal of ‘takeover terms’ (that is, banning the practice of the relaxation of the standard underwriting process for replacement business) for a policy or a group of policies that are transferred by an adviser between insurers and

• the establishment of a consistent adviser responsibility period across the industry of two years—with 100 per cent commission clawback if the policy lapses with an insurer within one year, and 50 per cent commission clawback if the policy lapses with an insurer during the second year.32

When this proposal was announced, the FSC intended that it would be finalised in 2012 ‘with an implementation date that would be consistent with the FOFA reforms’.33

One year later, in August 2012, the FSC finalised its proposed industry standard, which was to be effective from 1 July 2013.34 Key elements of the proposed standard included:

 Where an advised policy lapses within three years of commencement, a three year adviser responsibility

period will apply;

 A tiered commission claw-back provision will be introduced as follows:

o 100% of remuneration paid by an insurer to an adviser if the policy lapses within the first year;

o 75% of remuneration paid by an insurer if the policy lapses within the second year; and

o 50% of remuneration paid by an insurer if the policy lapses within the third year. 35

By February 2013 however, the implementation of the standard had been abandoned by the FSC.36 The CEO of the FSC was reported to have attributed the decision to ‘no longer having the unanimity on this approach’ and that ‘the proposed framework raised a complex set of factual, legal and economic issues from a competition perspective, which meant that it would have required regulatory approval in order to be implemented’.37 The CEO noted that the FSC ‘remains committed to ensuring a sustainable life insurance sector which will deliver outcomes for the community and the industry participants’.38

ASIC review On 9 October 2014, ASIC published a review of retail life insurance.39 The review, conducted between September 2013 and July 2014, examined:

30. J Brogden (CEO FSC), The FSC agenda for 2012 and beyond, speech, FSC Conference 2011, 4 August 2011, p. 13. 31. FSC, Churning in life insurance, op. cit. 32. Ibid.

33. Ibid.

34. FSC, New life insurance framework will reduce premiums, media release, 3 August 2012. 35. Ibid., p. 2. 36. K Kachor, ‘FSC backs down on policy framework’, Financial Observer, 15 February 2013. 37. Ibid.

38. Ibid.

39. ASIC, Review of retail life insurance advice, op. cit.

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• how life insurance is sold by advisers

• how advisers are remunerated for that advice

• the drivers behind product replacement advice to consumers and

• the quality of the personal advice consumers receive.40

The purpose of the review, described as a ‘proactive surveillance of life insurance advice’ in the 2014-15 ASIC annual report, was ‘to better understand the quality of advice consumers receive’.41

The ASIC review noted that life insurance policies are lapsing—when a policy ceases due to non-payment or cancellation by the client—at high rates, with policy lapses doubling from approximately seven per cent in the first year to 14 per cent in the second year.42 After the initial spike, lapse rates remain high (above 14 per cent) for the next three years before tapering.43 The factors for these higher lapse rates included:

• product innovation by insurers, such as changing actuarial assumptions at underwriting or the redesign of key policy features such as definitions and exclusions, which leads to the repricing of policies

• age-based premium increases affecting affordability, and

• incentives for advisers to write new business or rewrite existing business to increase commission income.44

The ASIC review also found a correlation between high lapse rates and upfront commission models.45

The main recommendations of the review did not necessarily advocate a stronger role for government in regulating remuneration arrangements. Instead, the recommendations were for insurers and financial advisers to examine, individually or as an industry, the business models and remuneration arrangements:

We recommend that insurers:

(a) address misaligned incentives in their distribution channels;

(b) address lapse rates on an industry-wide and insurer-by-insurer basis (e.g. by considering measures to encourage product retention); and

(c) review their remuneration arrangements to ensure that they support good-quality outcomes for consumers and better manage the conflicts of interest within those arrangements.

We recommend that AFS licensees:

(a) ensure that remuneration structures support good-quality advice that prioritises the needs of the client;

(b) review their business models to provide incentives for strategic life insurance advice;

(c) review the training and competency of advisers giving life insurance advice; and

(d) increase their monitoring and supervision of advisers with a view to building ‘warning signs’ into file reviews and create incentives to reward quality, compliant advice. 46

40. ASIC, Higher standards needed for life insurance industry, media release, 9 October 2014. 41. ASIC, Annual report 2014-15, ASIC, Sydney, October 2015, p. 37. 42. ASIC, Review of retail life insurance advice, op. cit., p. 5. 43. Ibid.

44. Ibid.

45. Ibid.

46. Ibid., pp. 7-8.

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Trowbridge Review Following the release of the ASIC review, in December 2014, the Association of Financial Advisers (AFA) and the FSC established a Life Insurance and Advice Working Group headed by former APRA member John Trowbridge, to review the ASIC report.47

Interim report An interim report was published by the FSC on 17 December 2014.48 The interim report put forward five models to be considered for direct adviser remuneration:

• level commissions only (no extra commission in year one) and no other direct remuneration

• hybrid commissions as currently understood as the maximum commissions (for example, dictating a maximum upfront commission of 80 per cent and level commission thereafter)

• modified hybrid comprising initial remuneration of a combination of commission at a level less than the current hybrid plus a fixed dollar payment. Renewal commissions could be as per current hybrid arrangements

• level plus fees comprising level commissions, at a rate to be considered, supplemented by an initial payment in the nature of a fee from the insurer to the adviser. Such a payment would not be a commission but a fee in the nature of cost recovery or expense reimbursement and

• level funded as a variation on ‘level’ where the commissions are level but to offset initial costs, on each policy inception the insurer lends the adviser funds that are repayable over say three to five years from renewal commissions.49

Final report The final report was released on 26 March 2015.50 In relation to remuneration arrangements, the final report proposed a remuneration model that was based on a fixed level of commission (maximum 20 per cent of premiums) supplemented by an ‘initial advice payment’.51 The recommendations were in two parts, with a ‘reform model’ (commencing from a date in 2018) supported by a three-year transition plan:

The Reform Model can be described as level commissions supplemented by an Initial Advice Payment available at a client’s first policy inception and then no more often than once every five years, where:

• the level commission is a maximum of 20% of premiums;

• the Initial Advice Payment (IAP) is paid by the insurer to the adviser on a per client basis (which would generally mean the insured life);

• the IAP is available to the adviser when a client first takes out a life insurance policy and subsequently no more often than once every five years and then only when a new policy is being taken out (the “five year rule”); and

• the IAP is a maximum of $1,200 or, for customers with annual premiums below $2,000, no more than 60% of the first year’s premiums.

The Transition Plan has two phases -

The first phase is where the five year rule is to apply on a best endeavours basis by insurers and licensees. It is recommended to commence as soon as possible, say 30 June 2015. In all other respects current arrangements would remain in place pending the second phase.

47. Trowbridge, Interim report on retail life insurance advice, op. cit., pp. i-ii. 48. Ibid.

49. Ibid., p. 25-30. 50. J Trowbridge, Review of retail life insurance advice: final report, FSC, 26 March 2015. 51. Ibid., p. 6.

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The second phase will require some form of regulation, to begin from a suitable date in 2016 and is where -

• the maximum commissions are to be on the current hybrid basis with a cap, so that the maximum initial commission is 80% of premiums capped at $8,000 and maximum renewal commission is 20%;

• for the purposes of the five year rule, the initial commission is to be treated as a recurring component of 20% and an IAP of 60% of premiums;

• this arrangement is to continue for two years pending full introduction of the Reform Model. 52

On 25 June 2015, the then Assistant Treasurer welcomed the release of the Trowbridge Review and noted that the Government would consider the proposals in the context of its response to the Financial System Inquiry.53

Financial System Inquiry The Financial System Inquiry (also referred to as the ‘Murray Inquiry’ after its chair Mr David Murray AO), conducted over the period late 2013 to late 2014, included some consideration of remuneration arrangements in the financial services industry.

Interim report In its interim report, released on 15 July 2014, the Murray Inquiry noted that ‘the principle of consumers being able to access advice that helps them meet their financial needs is undermined by the existence of conflicted remuneration structures in financial advice’.54 The interim report also sought some additional information about the extent of underinsurance.55

Final report In its final report, released on 7 December 2014, the Murray Inquiry made some specific recommendations about remuneration arrangements in the life insurance industry.56 The final report states:

With the exception of group life insurance policies inside superannuation and an individual life insurance policy for a member of a default fund, life insurance products are exempt from the [future of financial advice] ban on commissions. This allows individual life policies to be sold with high upfront commissions, creating an incentive for advisers to make a sale, rather than provide strategic advice. For example, these policies can have 100-130 per cent of the first year’s premium payable as upfront commissions, with an ongoing trail commission of around 10 per cent.

Upfront commissions can affect the quality of advice. ASIC found that 96 per cent of advice rated as a ‘fail’ was given by advisers paid under an upfront commission model. ASIC also found high upfront commissions encourage advisers to replace a consumer’s policy rather than retain it. In some cases, this may result in inferior policy terms. To date, industry approaches to address the issues in life insurance have not worked.

57

The Murray Inquiry recommended that a level commission structure be implemented through legislation requiring that an upfront commission is not greater than the ongoing commission.58 The final report also noted:

Alternative models of remuneration, such as delayed vesting of commissions and clawback arrangements, may simply delay the issue of churn and are complex. At this stage, the Inquiry does not recommend removing all commissions, as some consumers may not purchase life insurance if the advice involves an upfront fee. However, if level commission structures do not address the issues in life insurance, Government should revisit banning commissions.

52. Ibid., pp. 6-8. 53. J Frydenberg (Assistant Treasurer), Industry reform proposal on retail life insurance welcomed, media release, 25 June 2015. 54. Financial System Inquiry (FSI), Financial System Inquiry: interim report, Treasury, Canberra, July 2014, p. 1-20. 55. Ibid., p. 3-80. 56. FSI, Financial System Inquiry: final report, Treasury, Canberra, November 2014, pp. 217-226. 57. Ibid., p. 219. 58. Ibid., p. 220.

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The Inquiry has not determined the percentage amount of the level commissions that should apply in the life insurance sector. This should be left to the market and industry. 59

Government response to Financial System Inquiry The Government response to the Murray Inquiry was released on 20 October 2015.60 The Government response noted the release of the Trowbridge final report which had been delivered during the Murray Inquiry and proposed to proceed with the life insurance industry’s proposed reforms:

The Government agrees more can be done to better align the interests of financial firms and consumers. However, we intend to take a different approach to that recommended by the Inquiry for retail life insurance.

We support the retail life insurance industry’s proposed reforms as announced by the then Assistant Treasurer on 25 June 2015. The Government will consider the extent to which legislation and/or action by ASIC may be necessary to implement the industry agreement.

A Government review in 2018 will consider whether the new industry arrangements for life insurance advice have better aligned the interests of firms and consumers. If the review suggests further reform, consideration would be given to the Inquiry’s recommendation for a level commission structure or further extending the existing Future of Financial Advice provisions on conflicted remuneration to life insurance advice.

61

Final policy decision and draft legislation On 6 November 2015 the Assistant Treasurer announced that the Government had reached agreement with the life insurance industry about remuneration arrangements.62 Key elements of the announced package included:

• phasing down upfront commissions to a maximum of 80 per cent from 1 July 2016; 70 per cent from 1 July 2017 and then 60 per cent from 1 July 2018, together with a maximum 20 per cent ongoing commission and

• introducing a two year retention (‘clawback’) period as follows:

- in the first year of the policy, to 100 per cent of the commission on the first year’s premium and - in the second year of the policy, to 60 per cent of the commission on the first year’s premium.63 Treasury released draft legislation for consultation on 3 December 2015, with submissions due by 4 January 2016.64 The Assistant Treasurer noted in her second reading speech to the earlier Bill that over 20 submissions to the draft legislation had been received.65 At the date of publication of this Bills Digest, submissions to the draft legislation had not been published by Treasury.

On 15 December 2015 ASIC released a consultation paper seeking feedback on aspects of the proposed legislative instrument that would underpin much of the detailed arrangements that would be facilitated by the Bill.66 Comments on the consultation paper closed on 29 January 2016.67 Included in the consultation paper were the following proposed key thresholds in relation to maximum commissions and clawback arrangements:

• transitional arrangements for the setting of the maximum level of commissions at 80 per cent of the premium in the first year of the policy from July 2016, reducing to 70 per cent from 1 July 2017 and then to 60 per cent from 1 July 2018

59. Ibid.

60. Australian Government, Improving Australia's financial system: Government response to the Financial System Inquiry, Treasury, Canberra, 2015. 61. Ibid., p. 20. 62. K O’Dwyer (Assistant Treasurer), Government announces significant improvements to life insurance industry, media release,

6 November 2015. 63. Ibid.

64. The Treasury, ‘Life insurance reform legislation’, The Treasury website, 3 December 2015. 65. K O’Dwyer, ‘Second reading speech: Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016’ (earlier Bill), House of Representatives, Debates, 11 February 2016, p. 1368. 66. ASIC, ASIC consults on implementation of retail life insurance advice reforms, media release, 15 December 2015. 67. Ibid.

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• an ongoing commission for policy renewals will be set at a maximum of 20 per cent of the total of the premium paid for the renewal and

• a two-year clawback period for policies that have lapsed, with 100 per cent of the commission repaid if the policy lapses in the first year and 60 per cent of the commission repaid if the policy lapses in the second year.68

These key thresholds are consistent with the Government’s 6 November 2015 announcement.

Broader policy considerations The Government’s 6 November 2015 announcement made reference to several other policies that were part of a broader approach to improving the quality of financial advice for life insurance and the efficiency of the life insurance industry. These included:

• a Life Insurance Code of Conduct to be developed by the FSC by 1 July 2016. The Code would set out best practice standards for insurers, including in relation to underwriting and claims management

• financial services industry to have responsibility for widening Approved Product Lists through the development of a new industry standard.69 This industry standard will be a joint effort of all industry participants, led by the FSC

• ASIC to commence a review of Statements of Advice from the second half of 2016, with a view to making disclosure simpler and more effective for consumers as well as assisting advisers to make better use of these documents. The review of Statements of Advice will also consider whether the disclosure of adviser remuneration could be more effective, including prominent upfront disclosure of commissions and

• amendments to the Corporations Act to facilitate the rationalisation of legacy products in the life insurance and managed investment sectors, with further analysis of the taxation implications explored in the context of the Government’s Taxation White Paper process.70

A broader range of measures to improve the standard and quality of financial advice, through mandating educational standards and professional development standards, is also being pursued by the Government as part of its response to the Financial System Inquiry.71

Developments since the earlier Bill CommInsure Scandal CommInsure is one of Australia’s largest life insurance providers, with approximately four million policy holders.72 On 7 March 2016, Four Corners reported statements by CommInsure’s chief medical officer that the provider had avoided making payouts.73 In April 2016 ASIC commenced investigations into CommInsure’s life insurance business,74 and an industry wide review of life insurance claims handling practices.75

At the time of writing the investigation into CommInsure was still underway. ASIC stated:

ASIC has undertaken an extensive range of enquiries into the concerns raised. Enquiries are ongoing and no comment on potential outcomes will be made at this time. Given the wide ranging and often complex nature of these matters, ASIC's investigation is anticipated to continue for some time. 76

68. ASIC, Retail life insurance advice reforms, consultation paper, 245, ASIC, 15 December 2015, pp. 14-18. 69. An ‘approved product list’ generally refers to information about certain financial products put together by advice businesses to give their advisers the authority to provide advice about those products (ASIC, ‘Financial products and sales incentives: checking limits and connections’, Moneysmart website, last updated 9 November 2016).

70. O’Dwyer, Government announces significant improvements to life insurance industry, op. cit. 71. Australian Government, Improving Australia’s financial system: Government response to the Financial System Inquiry, op. cit., p. 21. 72. R Fogarty, ‘Who’s who in the Commonwealth Bank’s life insurance scandal’, Australian Broadcasting Corporation (ABC) News, 8 March 2016. 73. S Ferguson, K Toft and M Christodoulou, ‘Money for nothing’, Four Corners, ABC, 7 March 2016. 74. ASIC, Update on ASIC’s investigation into CommInsure, media release, 12 October 2016. 75. ASIC, Life insurance claims: an industry review, report, 498, ASIC, October 2016, p. 22. 76. ASIC, Update on ASIC’s investigation into CommInsure, op. cit.

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ASIC completed its industry-wide investigation into life insurance claims handling practices on 12 October 2016.77 The review:

… examined claims handling practices and claims outcomes in the life insurance sector. We sought to identify whether there were systemic issues across the industry, as well as more specific issues relating to particular products or insurers. 78

While the review ‘did not find evidence of cross-industry misconduct’, it did:

… identify issues of concern in relation to declined claim rates and claims handling procedures associated with:

(a) particular types of policies, notably TPD;

(b) particular insurers (typically for particular policy types); and

(c) particular causes for consumer disputes. 79

The review identified a number of ‘key areas of action’, including:

• additional public reporting on claims and claims outcome data

• strengthening the legal framework for claims handling

• targeted follow-up ASIC reviews, and

• stronger industry standards.80

Life insurance code of practice Following the Assistant Treasurer’s announcement on 6 November 2015, the Financial Services Council (FSC) consulted on and subsequently released a life insurance code of practice on 11 October 2016.81 The Code applies to FSC members, and other industry participants who adopt the Code through a formal agreement. The Code will be reviewed at least every three years by the FSC, and enforced by the Life Code Compliance Committee, which will be comprised of a consumer representative, an industry representative, and an independent chair.82 The Compliance Committee can require ‘rectification steps’, and publish information where these are not complied with.83

Parliamentary Joint Committee on Corporations and Financial Services On 14 September 2016, the Senate referred an inquiry into the life insurance industry to the Parliamentary Joint Committee on Corporations and Financial Services, for report by 30 June 2017.84 At the time of writing the Committee had not yet held public hearings or begun publishing submissions.

Committee consideration Senate Economics Legislation Committee The earlier Bill was referred to the Senate Economics Legislation Committee (Economics Committee) for inquiry and report by 15 March 2016.85 The Economics Committee received a similar form letter from 209 stakeholders

77. ASIC, Life insurance claims: an industry review, op. cit. 78. Ibid., p. 4.

79. Ibid., p. 6.

80. Ibid., pp. 10-11. 81. FSC, Life insurance code of practice, media release, 11 October 2016; O’Dwyer, Government announces significant improvements to life insurance industry, op. cit. 82. FSC, Life insurance code of practice, FSC, [Sydney], 2016, pp. 2, 24. 83. Ibid., p. 26. 84. Parliamentary Joint Standing Committee on Corporations and Financial Services, ‘Inquiry into the life insurance industry’, Inquiry homepage. 85. Senate Economics Legislation Committee, Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 [Provisions], The

Senate, Canberra, 2016. Details of the terms of reference, submissions to the Senate Standing Committee on Economics and the final report are available on the inquiry homepage.

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and 56 other submissions.86 Most submissions originated from persons working in the life insurance industry as advisers. They expressed a number of concerns, for instance:

• the legislation would have the effect of exacerbating Australia’s ‘chronic under-insurance crisis’87

• the amendments would create ‘barriers and impediments’ to those financial advisers who seek to improve education, operate honestly and in a trustworthy manner for the benefit of consumers88 so that the industry will see a reduction in adviser numbers89 and the Bill will not provide any identifiable benefits for consumers.90

The Economics Committee recommended that the Bill be passed.91 In additional comments, Labor members of the Committee noted the following concerns raised in submissions to the inquiry:

• the reviews preceding the reform focused on churning, and not appropriate methods of dealing with rogue advisers; the data sample used in ASIC's review was inadequate; and not all stakeholders were consulted

• the reform will adversely affect consumer choice and competition, and will see an increase in the cost of life insurance, coupled with the implementation of fees for advice and

• the life insurance advice industry will see a decline in adviser numbers and an increase in the market share of large institutions like banks.92

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills made no comment on the earlier Bill.93 The Committee has not yet reported on the current Bill.

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.94

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights considered the earlier Bill and concluded that it did not raise human rights concerns.95 The Committee has not yet reported on the current Bill.

Policy position of non-government parties/independents When the earlier Bill was debated in the House of Representatives on 3 March 2016, the Australian Labor Party (ALP) indicated that it would support it.96 While the ALP noted some issues of concern (such as separating out the cost of stamp duty and other government taxes in life insurance products), the overall position of the ALP was:

86. Senate Economics Legislation Committee, Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 [Provisions], op. cit., p. 1. 87. Austbrokers Financial Solutions (SYD), Submission, no. 4, to the Senate Standing Committee on Economics Legislation, Inquiry into the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, 2016. 88. K Davidson, Submission, no. 17, to the Senate Standing Committee on Economics Legislation, Inquiry into the Corporations Amendment (Life

Insurance Remuneration Arrangements) Bill 2016, 2016. 89. P Harrison, Submission, no. 24, to the Senate Standing Committee on Economics Legislation, Inquiry into the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, 2016. 90. B Moss, Submission, no. 25, to the Senate Standing Committee on Economics Legislation, Inquiry into the Corporations Amendment (Life

Insurance Remuneration Arrangements) Bill 2016, 2016. 91. Senate Economics Legislation Committee, Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 [Provisions], op. cit., p. 24. 92. Ibid., p. 25. 93. Senate Standing Committee for the Scrutiny of Bills, Alert digest, 2, 2016, The Senate, 24 February 2016, p. 63. 94. The Statement of Compatibility with Human Rights can be found at pages 23 and 24 of the Explanatory Memorandum to the Bill. 95. Parliamentary Joint Committee on Human Rights, Thirty-fourth report of the 44th Parliament, 23 February 2016, p. 1. 96. J Chalmers, ‘Second reading speech: Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016’, House of

Representatives, Debates, 3 March 2016, p. 2982.

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… [it] 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. 97

As noted previously, while ALP Senators made some additional comments in the Senate Economics Legislation Committee inquiry into the earlier Bill, the ALP Senators did not propose to oppose the earlier Bill.98

At the time of writing this Bills Digest, no other non-government parties or independent Senators or Members had publicly expressed a position on the Bill.

Position of major interest groups In her second reading speeches on both versions of the Bill, the Minister specifically acknowledged the work of the AFA, the Financial Planners Association (FPA) and the FSC ‘in working together to achieve sensible reforms for the sector which will benefit consumers through the provision of more appropriate advice and the long-term sustainability of the industry’.99

The AFA has generally supported the development of the regulatory package. On 6 November 2015 the AFA welcomed a reduction in the clawback period from three years to two years, noting that this ‘brings greater fairness to the [Life Insurance Framework] and that ‘[t]o succeed in having this reduced to two years is a great relief for our members, particularly those that own and operate small businesses’.100

The FSC comments on 6 November 2015 also supported the proposed arrangements, noting that the proposed changes were ‘a positive first step in lifting industry practices to improve consumer outcomes’.101 In a media release on 12 October 2016 the FSC also welcomed the reintroduction of the Bill, stating:

These legislative provisions are on track to limit upfront commissions to advisers and ban conflicted remuneration provisions on life insurance products … The life insurance remuneration bill will reduce conflicts and misaligned incentives by significantly reducing upfront commissions, extending the responsibility period to two years and prohibiting conflicted remuneration across life insurance. These reforms apply across life insurance and apply to all advisers equally.

102

The FPA also welcomed the proposed arrangements, noting that they were ‘a sensible outcome that will ensure the sustainability of the industry’.103 The FPA noted that the setting of the clawback period of two years was ‘a result of combined representation by the AFA and FPA’.104

National Seniors Australia (NSA) supports the intent of the regulatory package.105 However, while recognising that the package was a compromise solution, NSA considered that ASIC should be given the power to set level commissions and zero commissions and also that the clawback provisions should be strengthened to specify a minimum three-year period.106

Consumer organisation Choice, also commenting on the 6 November 2015 announcement, was generally supportive of the regulatory package but was ‘disappointed that the reforms have been watered down since they were announced in June’.107 Choice considered that the change from a three year clawback period was ‘the

97. Ibid.

98. Senate Economics Legislation Committee, Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 [Provisions], op. cit., p. 25. 99. O’Dwyer, ‘Second reading speech: Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016’, op. cit., p. 1398. K O’Dwyer (Minister for Revenue and Financial Services), ‘Second reading speech: Corporations Amendment (Life Insurance Remuneration

Arrangements) Bill 2016’ (current Bill), House of Representatives, Debates, 12 October 2016, p. 10. 100. Association of Financial Advisers, Life Insurance Framework improvements achieved, media release, 6 November 2015. 101. FSC, FSC statement on life insurance reforms, media release, 6 November 2015. 102. FSC, Life insurance remuneration reforms, media release, 12 October 2016. 103. Financial Planners Association (FPA), FPA welcomes “fair and workable” government announcement on life insurance, media release,

9 November 2015. 104. Ibid. 105. National Seniors Australia, Submission to Treasury, Inquiry into Life insurance reform legislation, 4 January 2016, p. 1. 106. Ibid., p. 2. 107. Choice, Life insurance reforms a good first step: further reforms needed before consumers can trust advice is in their interests, media release,

6 November 2015.

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result of an aggressive lobbying campaign by financial advisers seeking to protect the conflicted remuneration models upon which their industry is built’.108

Financial implications The Explanatory Memorandum notes that the financial impact on the Commonwealth of the measures proposed by the Bill is ‘nil’.109

However, the Regulation Impact Statement acknowledges:

For large and medium sized licensees, there will be implementation costs associated with updating IT and other systems. It is assumed that small licensees do not have advanced IT systems and so the IT costs are not likely to be material. All licensees will have additional costs associated with monitoring compliance with the new regulations.

Individual financial advisers will incur a small cost associated with updating their knowledge of the remuneration arrangements, including clawback.

It is estimated that the increase in annual compliance costs for the industry as a whole will amount to $27.8 million. 110

Key issues and provisions Delayed start date The commencement date for the earlier Bill, introduced in the 44th Parliament, was 1 July 2016, with an unlegislated ASIC review intended for 2018.111 The commencement date for the current Bill is 1 January 2018, with an ASIC review intended in 2021. The Minister stated:

The government has continued to listen to feedback raised by industry and key stakeholders during consultation on the life insurance reforms … the government has amended the commencement date of the reforms to 1 January 2018. This will enable the government to remove the generous grandfathering that was available under FoFA, which allowed advisers to continue to receive conflicted remuneration for the length of their enterprise agreements plus an additional 12 months.

The government wants these reforms to start as soon as possible and to apply equally to all advisers, whether they own their own small business or they are employed by a major bank. To achieve this, the reforms will commence 12 months after the entire reform package is settled. This will provide advisers with 12 months to renegotiate their collective agreements to be consistent with the new legislation.

112

The Corporations Regulations 2001 specify that if a benefit is paid under an enterprise agreement that was entered into before 1 July 2013, then certain restrictions on conflicted remuneration do not apply (are ‘grandfathered’) for a specified period.113

Why regulate life insurance remuneration arrangements? In her second reading speeches on both Bills, the Minister noted that the proposed changes ‘strike the right balance between protecting consumers and recognising the need for ongoing viability and industry stability’.114

108. Ibid. 109. Explanatory Memorandum, Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, p. 4. 110. Ibid., pp. 19-20. 111. K Swoboda, Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, Bills digest, 103, 2015-16, Parliamentary

Library, Canberra, 31 March 2016, pp. 1, 17. Parliament of Australia, ‘Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016’, op. cit., clause 2. 112. O’Dwyer, ‘Second reading speech: Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016’, op. cit., pp. 10-11. 113. Corporations Regulations 2001, subregulation 7.7A.16C(2). Subregulation 7.7A.16C(3) specifies that where an enterprise agreement has not expired by 1 July 2013, then the grandfathering applies for 18 months after the nominal expiry date. The Corporations Act 2001, paragraph 1528(4) specifies that the ban on conflicted remuneration applies from 1 July 2013, unless an earlier date applies. A nominal expiry date must be no longer than four years from the date the Fair Work Commission approves the agreement (Fair Work Ombudsman, ‘Enterprise bargaining’, Fair Work Ombudsman website). 114. O’Dwyer, ‘Second reading speech: Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016’ (earlier Bill), op. cit.; O’Dwyer, ‘Second reading speech: Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016’ (current Bill), op. cit.

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The balance needs to be struck in respect of two matters:

• first, balancing the objective for more people to take out life insurance and the remuneration arrangements that may contribute to inappropriate advice and life insurance products being chosen by a consumer and

• second, the form of regulation and the extent of government intervention required to achieve the desired outcomes.

Consumer interests As noted previously, the exemption for life insurance outside of superannuation from the conflicted remuneration arrangements under FOFA was largely based on concerns about affordability and the potential for under-insurance.115

Commission-based arrangements for the sale of life insurance, where products can be complex and there exists asymmetric information between buyer and seller about remuneration arrangements, can lead to greater incentives to provide biased advice to unsophisticated potential consumers.116 Economic analyses suggest that a commission-based model can be superior to the alternative upfront fee-for-service approach, although this result can depend on the extent to which different consumers are prepared to directly pay for advice and the value they attach to the advice.117

The approach proposed by the Bill dilutes, but does not remove, the influence of commission-based remuneration arrangements in part of the life insurance industry. It also steers a middle course through the proposals of the Trowbridge final report for a fixed level of commission (maximum 20 per cent of premiums) supplemented by an ‘initial advice payment’ and the recommendations of the Murray Inquiry which were for a level commission structure requiring that an upfront commission is not greater than the ongoing commission.118

Form of regulation There has been some history of self-regulation in parts of the financial services industry through the development of industry codes of practice or codes of conduct. The first such financial services code was adopted in 1989 whilst a code covering life insurance was developed in 1995.119 Initially, such codes were viewed largely as part of an ‘enrolment’ process to draw industry into the regulatory system.120 While such codes are sometimes viewed as a defensive mechanism by industry, it is also arguable that they have become more forward-looking initiatives, ‘focusing on improving standards and providing genuine consumer protection.121

As noted previously the life insurance industry, through the FSC, had attempted to develop an industry standard to address issues related to churning and inappropriate advice. However, although the industry has introduced a life insurance code of practice, the failure of the industry to self-regulate in relation to remuneration has arguably necessitated the government stepping in to regulate remuneration arrangements.

The Trowbridge final report supported government intervention, noting:

It is essential for the integrity of the recommendations on adviser remuneration and licensee remuneration that there be some kind of externally imposed regulation on the industry. An effective form of this regulation, given the nature of the regulation required and the ability of ASIC to maintain an associated compliance regime, is likely to be the imposition by ASIC of licensing conditions on life insurers. These conditions would oblige all life insurers, and through them all licensed adviser groups (generally referred to as licensees in this report) by means of the

115. Trowbridge, Interim report on retail life insurance advice, op. cit., p. 7. 116. H Gravelle, ‘Remunerating information providers: commissions versus fees in life insurance’, Journal of Risk and Insurance, 61(3), September 1994, p. 425. 117. Ibid., p. 452-453. 118. Financial System Inquiry, Final report, op. cit., pp. 220; Trowbridge, Review of retail life insurance advice: final report, op. cit., p. 6. 119. G Pearson, ‘The place of codes of conduct in regulating financial services’, Griffith Law Review, 15(2), 2006, pp. 340-342. 120. Ibid., p. 363. 121. N Howell, ‘Revisiting the Australian Code of Banking Practice: is self-regulation still relevant for improving consumer protection standards?’,

University of New South Wales Law Journal, 38(2), 2015, p. 552.

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contractual relationships between insurers and licensees, to conform to the Reform Model, the Transition Plan and the avoidance of conflicts of interest by licensees. 122

The Murray Inquiry also backed implementing its recommendations for a level commission structure through legislation.123

Facilitative provisions The main elements of the Bill amend the conflicted remuneration framework in Part 7.7A of the Corporations Act to empower ASIC to make a legislative instrument which will regulate benefits paid to life insurance brokers and advisers on the sale of life insurance products. These include some key concepts and definitions.

Allowable commissions and clawbacks Existing section 963E of the Corporations Act bans a financial services licensee from accepting conflicted remuneration. The term conflicted remuneration is defined as any benefit, whether monetary or non-monetary, given to a financial services licensee (or their representative) who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:

• could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients or

• could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.124

However, certain benefits are exempted from the definition of conflicted remuneration. In particular, paragraph 963B(1)(b) of the Corporations Act provides that a benefit in relation to life products other than a group life policy for members of a superannuation entity or a life policy for a member of a default superannuation fund is not conflicted remuneration. Item 8 repeals and replaces paragraph 963B(1)(b) to limit the extent of the exemption. Proposed paragraph 963B(1)(b) provides for a similar exemption for life insurance products outside of superannuation to that which currently exists—subject to either the benefit ratio for the benefit being the same for each year in which the product is continued or satisfying the benefit ratio requirements and the clawback requirements.

Proposed paragraph 963(1)(ba) provides that benefits in relation to consumer credit insurance are also exempt from the definition of conflicted remuneration. Existing section 963D of the Corporations Act provides that a benefit in relation to consumer credit insurance is not conflicted remuneration in certain instances. The Explanatory Memorandum states that proposed paragraph 963B(1)(b) ‘ensures that the strict arrangements that apply to commissions paid on those products under the National Credit Code continue to apply’.125

The Bill also includes a change that was not in the earlier Bill. Proposed section 963AA specifies that the regulations may specify instances in which a benefit given in relation to a life risk insurance product or products is conflicted remuneration. The Explanatory Memorandum states:

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. 126

The Minister stated that this is to ensure that ‘… sales of life insurance that do not technically involve advice are captured by the reforms.’127

122. Trowbridge, Review of retail life insurance advice: final report, op. cit., p. 11. 123. Financial System Inquiry, Final report, op. cit., p. 220. 124. Corporations Act, section 963A. 125. Explanatory Memorandum, Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, p. 9. The National Credit Code

is at Schedule 1 to the National Consumer Credit Protection Act 2009. 126. Explanatory Memorandum, Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, op. cit., pp. 8-9. 127. O’Dwyer, ‘Second reading speech: Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016’ (current Bill), op. cit.

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Benefit ratio requirements Item 11 inserts proposed subsections 963B(3A)-(3C) into the Corporations Act, to define benefit ratio and policy cost. The benefit ratio is the ratio between the benefit (that is, the benefit paid to an adviser or broker) and the policy cost payable for the product for the year. The policy cost is the total of:

• the premiums payable for the product, or products, for that year

• any fees payable for that year to the issuer of the product

• any additional fees payable because the premium for the product is paid periodically rather than in a lump sum and

• any other amount prescribed by the regulations.128

The benefit ratio requirements are satisfied in relation to a benefit for a life risk insurance product if the benefit ratio for the benefit for the year in which the product is issued and for each year that the product is continued is equal to or less than that determined by ASIC, by legislative instrument, as an acceptable benefit ratio for that year.129

Clawback requirements The clawback requirements are satisfied if:

• the arrangement under which the benefit is payable includes an obligation to repay all or part of the benefit if within two years after the insurance product is first issued to a retail client either:

- the product is cancelled or is not continued within two years after it is first issued to a retail client, other than because a claim is made under the insurance policy or because other prescribed circumstances exist or

- the policy cost for the product during a year or across two years is reduced within two years after it is first issued to a retail client and • the amount to be repaid under the obligation is equal to or greater than the amount determined by ASIC, by legislative instrument to be an acceptable repayment.130

Although the contents of the legislative instruments are not known, by way of guidance, ASIC’s December 2015 consultation paper proposed the following key thresholds in relation to maximum commissions and clawback arrangements:

• transitional arrangements for the setting of the maximum level of commissions at 80 per cent of the premium in the first year of the policy from July 2016, reducing to 70 per cent from 1 July 2017 and then to 60 per cent from 1 July 2018

• an ongoing commission for policy renewals will be set at a maximum of 20 per cent of the total of the premium paid for the renewal

• a two-year clawback period for policies that have lapsed, with 100 per cent of the commission repaid if the policy lapses in the first year and 60 per cent of the commission repaid if the policy lapses in the second year.131

Transitional arrangements Item 17 inserts transitional arrangements into the Corporations Act. Proposed section 1549A inserts the meaning of the term commencement day. This will be 1 January 2018.

The amendments in the Bill apply to benefits given under an arrangement that is entered into after 1 January 2018.132 They do not apply to benefits given under an arrangement that is entered into before 1 January 2018—provided that the life product is issued within three months of 1 January 2018.133

128. Corporations Act, proposed subsection 963B(3B). 129. Corporations Act, proposed subsections 963BA(1) and (2) inserted by item 13 of the Bill. 130. Corporations Act, proposed subsections 963BA(3) and (4) inserted by item 13 of the Bill. 131. ASIC, Retail life insurance advice reforms, op. cit., pp. 14-18. 132. Corporations Act, proposed subsection 1549B(1) inserted by item 17 of the Bill.

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Further flexibility in implementation is provided through a regulation making power to prescribe circumstances in which the arrangements do, or do not apply.134

2021 Review The success or otherwise of the proposed remuneration arrangements is intended to be examined as part of a review by ASIC in 2021.135 The requirement for ASIC to undertake this review is not part of the Bill.

ASIC has existing powers under section 912C of the Corporations Act to facilitate the collection of relevant information from financial services licensees. Item 1 inserts new proposed paragraph 912C(1A)(e) so that such information may be collected in a specified manner (including in electronic form).

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133. Corporations Act, proposed subsection 1549B(2) inserted by item 17 of the Bill. 134. Corporations Act, proposed subsection 1549B(3) inserted by item 17 of the Bill. 135. Explanatory Memorandum, Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, op. cit., p. 12.