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Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016

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2016

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

corporations amendment (life insurance remuneration arrangements) bill 2016

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP)



Table of contents                           

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Removal of exemption to the ban on conflicted remuneration       5

Chapter 2               Regulation impact statement............................................ 15

Chapter 3               Statement of Compatibility with Human Rights............ 23

Index................................................................................................................. 25

 

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

ASIC

Australian Securities and Investments Commission

Bill

Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016

Corporations Act

Corporations Act 2001

FOFA

Future of Financial Advice

FOFA Legislation

Part 7.7A of the Corporations Act 2001 , as introduced by the Corporations Amendment (Future of Financial Advice) Act 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012

FSI

Financial System Inquiry

Licence

Australian Financial Services Licence

Licensee

Holder of an Australian Financial Services Licence

Life Insurance Act

Life Insurance Act 1995

Life insurance

life risk insurance products

National Credit Code

The National Credit Code set out in Schedule 1 to the National Consumer Credit Protection Act 2009

Ongoing commission

A commission paid in the years after the first year of the premium

RIS

Regulation Impact Statement

Trowbridge Review

Review of Retail Life Insurance Advice

 

Upfront commission

A commission paid in the first year of the premium that is higher than ongoing commissions.

 



Overview

Schedule 1 to this Bill makes amendments to the Corporations Act 2001 (Corporations Act) to give effect to industry’s life insurance reform package; the final details of which were announced by the then Minister for Small Business and Assistant Treasurer, in a media release titled ‘Government Announces Significant Improvements to Life Insurance Industry’ on 6 November 2015.

The Bill was previously introduced into the Parliament on 11 February 2016; however, the Bill lapsed at prorogation on 15 April 2016.

The purpose of these reforms is to better align the interests of consumers with those providing advice.

The Bill removes the exemption in the Corporations Act from the ban on conflicted remuneration for benefits paid in relation to certain life risk insurance products (life insurance). The scope of the amendments contemplated by this legislation covers situations where life insurance sales involve the provision of either personal or general financial advice. This means that the amendments include the sale of life insurance through direct sales channels. The Bill also includes the power for regulations to prescribe other circumstances where a benefit paid in relation to life insurance is conflicted remuneration even where no advice is provided.

The Bill enables the Australian Securities and Investments Commission (ASIC) to make a legislative instrument to permit benefits in relation to life insurance 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 upfront commission is paid back to the life insurer by the financial adviser if the life insurance policy is cancelled or the premium is reduced. 

The Bill also applies a ban on volume-based payments to life insurance and includes transitional (grandfathering) arrangements in the Corporations Act.  

An existing provision in the Corporations Act can be used to facilitate ongoing reporting to ASIC on policy replacement data. This data will assist ASIC in its scheduled 2021 Review of the new arrangements.

Date of effect : The amendments take effect from 1 January 2018.

Proposal announced : The proposal was announced by the then Minister for Small Business and Assistant Treasurer by media release on 6 November 2015.

Financial impact : Nil.

Human rights implications : This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 3.

Compliance cost impact $27.8 million annually.

Summary of regulation impact statement

Regulation impact on business

Impact : The amendments to the Corporations Act impact life insurance companies, financial advisers and consumers of life insurance.

Main points :

•        The Government has been informed of the regulatory impacts of various reform options by the findings of three independent reviews - ASIC’s review of retail life insurance advice, the Review of Retail Life Insurance Advice (Trowbridge Review) and the Financial System Inquiry (FSI) - as well as through targeted consultations with industry stakeholders.

•        ASIC found unacceptable levels of poor quality advice, and a strong connection between upfront commissions and poor consumer outcomes, including in situations where the recommendation was to switch products.

•        Alternative reform options included a level commission model (proposed by the FSI) as well as a model consisting of an Initial Advice Payment and level commissions of 20 per cent of premiums (proposed by the Trowbridge Review).

•        In 2021 ASIC will conduct a further review to consider whether the new industry arrangements for life insurance advice have better aligned the interests of financial firms and consumers.



Outline of chapter

1.1                   Schedule 1 to this Bill amends the Corporations Act 2001 (Corporations Act) to remove the exemption from the conflicted remuneration ban on benefits paid in relation to certain life insurance products.

1.2                   Benefits paid in relation to life insurance are permissible under certain circumstances specified by the Australian Securities and Investments Commission (ASIC) in a legislative instrument.

Context of amendments

1.3                   Previously, paragraph 963B(1)(b) of the Corporations Act provided a broad exemption from the conflicted remuneration ban for benefits paid in relation to certain life insurance products.

1.4                   A life insurance product is defined in paragraph 764A(1)(e) of the Corporations Act as a life policy, or a sinking fund policy within the meaning of the Life Insurance Act 1995 (Life Insurance Act), that is a contract of insurance. The definition excludes payments by employee associations, certain payments under the Life Insurance Act, funeral benefits and employee benefits paid by employers.

1.5                   Some common life insurance products include:

•        Life insurance - a form of insurance that pays out a lump sum to a beneficiary upon the death of the client.

•        Total and Permanent Disability cover - a form of insurance that pays out a lump sum if the client becomes totally and permanently disabled. Different insurers have different definitions of what it means to be totally and permanently disabled.

•        Trauma cover - a form of insurance that provides cover if a person is diagnosed with a specified illness or injury. These policies include major illnesses or injuries that will have a significant impact on a person's life, such as cancer or a stroke.

•        Income protection insurance - replacing the income lost due to a person’s inability to work due to injury or sickness.

1.6                   A series of reports have identified a need for reform in the life insurance sector.

1.7                   In October 2014 ASIC released Report 413: Review of Retail Life Insurance Advice . The report identified a strong connection between upfront commissions, policy lapse rates and poor consumer outcomes - 45 per cent of advice provided under an upfront commission model failed to comply with the law. The report also found that 82 per cent of the industry utilised upfront commission arrangements and that upfront commissions are generally between 100 and 130 per cent of the premium.

1.8                   In response to the ASIC report, the Government called on industry to review remuneration practices in the life insurance industry. Mr John Trowbridge was appointed as independent Chair of the Review of Retail Life Insurance Advice (Trowbridge Review), published on 26 March 2015.

1.9                   The Trowbridge Review recommended several reforms, including a significant reduction in upfront commissions.

1.10               The Government also commissioned a review of Australia’s financial system, the Financial System Inquiry (FSI), led by Mr David Murray AO.

1.11               The FSI recommended a complete abolition of the current upfront commission model, and a move to level commissions, where any upfront commission does not exceed ongoing commissions.

1.12               In its response to the FSI, the Government announced its support for an industry-developed reform package. The Government announced a revised reform package by media release on 6 November 2015. 

Summary of new law

1.13               The Bill removes the exemption from the ban on conflicted remuneration in section 963B(1)(b) of the Corporations Act for benefits paid in relation to certain life insurance products issued after the commencement date. Benefits paid in relation to life insurance products issued after the commencement date are therefore subject to the ban on conflicted remuneration. Level commissions are not affected by this change.

1.14               The Bill also enables the regulations to prescribe circumstances in which benefits paid in relation to life insurance are conflicted remuneration.

1.15               The Bill amends the Corporations Act to give ASIC the power to specify, by instrument, the criteria that must be satisfied for certain life insurance products to be exempt from the ban on conflicted remuneration (ASIC Instrument).

1.16               The criteria ASIC is empowered to specify in the ASIC Instrument are:

•        the ratio between the benefit payable to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice in relation to a life insurance product, or products and the amount payable for the product, or products, to which the benefit relates, and

•        the amount, or way of working out the amount, that is an acceptable payment that is to be repaid under clawback.

Comparison of key features of new law and current law

New law

Current law

Benefits paid in relation to life insurance products (including commissions and volume-based payments) issued after the commencement date are subject to the ban on conflicted remuneration, unless they satisfy the criteria in the ASIC instrument.

Benefits paid in relation to life insurance products (except for a group life policy for members of a superannuation entity, or a life policy for a member of a default superannuation fund) are exempt from the ban on conflicted remuneration.

Regulations can prescribe circumstances in which a benefit in relation to a life insurance is conflicted remuneration.

No equivalent regulation making power.

The components on which a commission may be payable are introduced under a concept of ‘policy cost.’

No guidance on the components on which a commission may be payable.

Gives ASIC the power to create an instrument specifying the maximum acceptable commission percentages in the first and subsequent years of a policy (the ‘benefit ratio requirements’), and the amount that will be clawed back over the two year clawback period (the ‘clawback requirements’)

No ASIC instrument-making power in relation to commissions paid and the amount that will be clawed back in each year.

ASIC may require information to be given in a specified manner, including in electronic form.

No specification about the form in which ASIC may request information.

Detailed explanation of new law

Removing the conflicted remuneration exemption

1.17               This Bill removes the exemption from the ban on conflicted remuneration that applies to licensees, or representatives, in relation to certain life insurance products. The effect of the amendment is that all benefits paid in relation to life insurance, whether offered inside or outside superannuation, are subject to be ban on conflicted remuneration.  [Schedule 1, item 8, paragraph 963B(1)(b)]

1.18               The Bill does not apply to benefits paid in relation to products issued before the commencement date. This means that the exemption from the ban on conflicted remuneration under paragraph 963B(1)(b) continues to apply to benefits relating to these products (see ‘Application and transitional provisions’).

1.19               Conflicted remuneration is defined in section 963A of the Corporations Act and means any benefit, whether monetary or non-monetary, given to a financial services licensee, or a representative of a financial services licensee, 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 or the financial produce advice given to retail clients.

1.20               The Bill also enables regulations to prescribe circumstances in which benefits in relation to life insurance products are conflicted remuneration, enabling sales of life insurance that do not involve financial product advice to be captured by the reforms. 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. [Schedule 1, item 6, section 963AA]

1.21               The Bill removes the exemption from the ban on conflicted remuneration in paragraph 963B(1)(c) where no financial product advice is provided for life insurance products. The Bill removes this exemption to ensure that the regulations can effectively prescribe the circumstances in which benefits in relation to life insurance are conflicted remuneration even where the circumstances do not involve the provision of financial product advice. [Schedule 1, item 9, paragraph 963B(1)(c)]

1.22               However, consistent with the Future of Financial Advice (FOFA) reforms, benefits that are not considered to be conflicted remuneration or benefits that are expressly excluded from the ban on conflicted remuneration do not need to comply with the requirements of the ASIC Instrument.

1.23               Benefits given in relation to consumer credit insurance are also excluded, in order to ensure that the strict arrangements that apply to commissions paid on these products under the National Credit Code continue to apply. [Schedule 1, item 8, paragraph 963B(1)(ba)]

Enabling certain types of commissions to be paid

1.24               The Bill enables ASIC, via a legislative instrument, to permit benefits in relation to life insurance to be excluded from the definition of conflicted remuneration, provided certain requirements are met (herein referred to as the ‘ASIC instrument requirements’). The ASIC instrument requirements relate to:

•        the amount of the commissions; and

•        clawback arrangements. [Schedule 1, item 13, subsections 963BA(2) and 963BA(4)]

1.25               Both the commission and clawback arrangements must be met to obtain the exemption to the ban on conflicted remuneration. [Schedule 1, item 8, sub-subparagraph 963B(1)(b)(iii)(B)]

1.26               The Bill amends the Corporations Act to introduce a concept of ‘policy cost’ for life insurance products on which commissions may be paid. [Schedule 1, item 4, section 960]

1.27               The components of the policy cost may be:

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

•        fees payable to the issuer for the issue of the product, or products, for that year;

•        any additional fees payable because the premium for the product, or products, is paid periodically rather than in a lump sum (known as ‘frequency loading’); and

•         any other amount prescribed by the regulations. [Schedule 1, item 11, subsection 963B(3B)]

1.28               The Bill also provides that regulations may prescribe amounts that are not to be included in the policy cost. [Schedule 1, item 11, subsection 963B(3C)]

Amount of the commissions

1.29               A commission is a benefit generally paid by the issuer of the life insurance product to a licensee or authorised representative of the licensee that provided financial product advice in relation to a life insurance product. It is a payment based on a percentage of the sale price of the product. Depending on the circumstances, a commission may or may not include GST. Where the commission includes a GST component, the GST component is not intended to be a benefit for the purposes of the conflicted remuneration provisions.

1.30               The first requirement to obtain an exemption from the conflicted remuneration ban is to be within the acceptable levels of upfront and ongoing commissions. [Schedule 1, item 13, subsection 963BA(1)]

1.31               ASIC has the power in the ASIC Instrument to set the acceptable amount for both the upfront commission and for ongoing commissions for certain life insurance products. [Schedule 1, item 13, subsection 963BA(2)]

1.32               The acceptable amount is determined by reference to the ratio between the benefit (that is, the commission) and the policy cost. This is referred to as the ‘benefit ratio’.

•        If the benefit ratio is at or below the acceptable amount, then such benefits are permissible under law (exempt) and are considered to not be conflicted remuneration.

•        If the benefit ratio is paid above the acceptable amount, then such benefits are not permissible under law (exemption unavailable) and are considered to be conflicted remuneration. [Schedule 1, items 4, 11 and 13, section 960, subsection 963B(3A), subsections 963BA(1) and (2)]

1.33               Under the amendments level commissions are still able to be paid. There is no maximum cap on level commissions. [Schedule 1, item 8, sub-subparagraph 963B(1)(b)(iii)(A)]

1.34               The ASIC Instrument can set the acceptable benefit ratio for upfront and ongoing commission amounts. It is anticipated that there will be a three stage transition over a period of two years to allow the industry to adapt to the new regulatory environment.

Clawback Arrangements

1.35               The second requirement to obtain the benefit of an exemption from the conflicted remuneration bans is to comply with the clawback arrangements (the ‘clawback requirements’). [Schedule 1, item 13, subsection 963BA(3)]

1.36               ‘Clawback’ is where a certain portion of the upfront commission is paid back to the life insurer, under certain circumstances.

1.37               The legislation specifies that clawback occurs in the first two years of a policy where the product is cancelled or is not continued, other than because a claim is made under the insurance policy or because other prescribed circumstances exist. ASIC has the power in the ASIC instrument requirements to determine how much is clawed back each year. [Schedule 1, item 13, subsections 963BA(3) and (4)]

1.38               The introduction of mandatory clawback arrangements is intended to limit incentives to ‘churn’ clients through to a new product in order to receive a new upfront commission.

1.39               It is anticipated that the practical application of the clawback requirements will be given effect by insurers, licensees and representatives through relevant commercial and employment agreements as necessary.

1.40               Consistent with FOFA reforms, there are certain benefits that are not considered to be conflicted remuneration (and therefore not required to comply with the conditions of the ASIC Instrument, such as clawback). These types of benefits include education-related non-monetary benefits, fees paid by the consumer to the adviser, and grandfathered benefits.

1.41               ASIC has the power in the ASIC Instrument to determine the amount, or a way of working out the amount, that is an acceptable payment under the clawback arrangements. [Schedule 1, item 13, subsection 963BA(4)]

Reporting Data to ASIC

1.42               The Government has requested that ASIC undertake a review of the sector to assess whether the reforms have better aligned the interests of advisers and consumers, and whether further reforms are required. The review is to be undertaken in 2021 (2021 Review).

1.43               The 2021 Review will consider a range of factors including: the distribution and sale of life insurance, the provision of advice, adviser commissions, policy lapse rates and premiums, and life insurance levels. Related factors (such as the effect of the introduction of a Life Insurance Code of Practice) may also be considered. The specific information to be collected to support the review will be the subject of consultation with industry.

1.44               An existing provision (subsection 912C(1) in the Corporations Act) will be used to facilitate ongoing reporting to ASIC on policy replacement data. This data will assist ASIC to undertake the 2021 Review.

1.45               An amendment is made to ASIC’s existing data collection powers under the Corporations Act to clarify that ASIC may require that data be provided to it in electronic form. This change is made to assist ASIC with data collection in relation to the monitoring of the life insurance sector. [Schedule 1, item 1, paragraph 912C(1A)(e)]

1.46               Under this approach, requests for data by ASIC are subject to merits review consistent with other data requests under this provision.

Consequential amendments

1.47               This Bill includes a number of minor and consequential amendments to the Corporations Act. [Schedule 1, items 2, 3, 5, 7, 10, 12, 14, 15, and 16, the definitions of ‘benefit ratio’ and ‘conflicted remuneration’ in section 960, the note to section 963A, subsection 963B(1), subparagraph 963B(1)(c)(i), subsections 963B(5), 963C(1), 963C(3), and 963D(4)]

Application and transitional provisions

1.48               These provisions commence on 1 January 2018. [Schedule 1, item 2]

1.49               The amendment applies to benefits given under any arrangement whether made before, on or after the commencement day. [Schedule 1, item 17, section 1549A and subsection 1549B(1)]

1.50               However, the amendment does not apply to products issued before the commencement date or where a life insurance product is applied for before the commencement date and the product is issued within three months of commencement date. [Schedule 1, item 17, subsection 1549B(2)]

1.51               In effect, when considering benefits relating to a product issued before the commencement date, the law continues to apply as though Schedule 1 of the Bill never applied.

1.52               This means that the exemption from the ban on conflicted remuneration that was provided under paragraph 963B(1)(b) before the commencements of the reforms continues to apply to benefits given in relation to products issued before the commencement date.

1.53               Regulations may prescribe particular circumstances under which the amendments do not apply to a benefit. [Schedule 1, item 17, subsection 1549B(3)]

1.54               The amendments do not apply if the operation of the amendments would result in an acquisition of property from a person otherwise than on just terms. [Schedule 1, item 17, subsection 1549B(4)]



Chapter 2          

Regulation impact statement

 

2.1                   On 20 October 2015, the Government announced as part of its response to the Financial System Inquiry (FSI) that it would support the retail life insurance industry’s proposed reforms as announced by the then Assistant Treasurer on 25 June 2015. In taking this decision and subsequent decisions on the details of the reform package, the Government was informed of the regulatory impacts of various reform options by the findings of three independent reviews as well as through targeted consultations with industry stakeholders.

2.2                   The independent reviews of the life insurance remuneration arrangements are:

•        Australian Securities and Investments Commission Report 413: Review of retail life insurance advice, October 2014 (ASIC Review).

•        John Trowbridge, Review of Retail Life Insurance Advice Final Report, 26 March 2015 (Trowbridge Review).

•        FSI Final Report, November 2014.

2.3                   The reform package announced by the then Assistant Treasurer on 25 June 2015 was constructed on behalf of the life insurance industry by the Financial Services Council (FSC), the Association of Financial Advisers (AFA) and the Financial Planning Association (FPA). Targeted consultations with these stakeholders has been ongoing.

2.4                   Treasury has certified that the independent reviews and consultations is a process and analysis equivalent to a Regulation Impact Statement (RIS).

2.5                   The Australian Government Guide to Regulation identifies seven questions that a RIS should address. Following is a summary of the analysis of these questions that occurred as part of the independent reviews and stakeholder consultation process.

Problem

2.6                   In 2014, ASIC undertook a surveillance to understand the personal advice consumers were receiving about life insurance and to identify opportunities to promote personal life insurance advice that is in the best interests of consumers. The findings from this surveillance were presented in the ASIC Review published in October 2014.

2.7                   ASIC found unacceptable levels of poor quality advice, and a strong connection between upfront commissions, policy lapse rates and poor consumer outcomes. ASIC found that, overall, 37 per cent of the advice reviewed failed to comply with the quality of advice standard in force at the time the advice was given. The non-compliance rate for advice provided under an upfront commission model was even higher, with 45 per cent of this advice failing to comply.

2.8                   The factors ASIC identified that affected quality of advice were:

•        adviser incentives;

•        inappropriate scaling of advice;

•        lack of strategic life insurance advice;

•        weak rationales for product replacement advice; and

•        failure to consider the relationship between life insurance and superannuation.

2.9                   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. The prevailing form of remuneration was upfront commissions (in the order of 100-130 per cent of the premium), with an ongoing commission of around 10 per cent of the premium.

Need for government action

2.10               There have been many regulatory interventions by Australian Governments in recent years to help improve trust and confidence in the financial services industry and the quality of information for which consumers of financial services have access. Government intervention is justified because of the significant costs to individuals, the community and/or taxpayers that can result from poor information on the benefits and risks of financial services, including life insurance.

2.11               The problems associated with remuneration arrangements that involve commissions have been known for some time. Under the Future of Financial Advice (FOFA) reforms, conflicted remuneration, such as commissions, was prohibited.

2.12               However, benefits paid in relation to life insurance were exempt from this prohibition. The ban on conflicted remuneration does not apply to life insurance due to the features which make it unique from investment products, including the absence of investible funds from which to pay for advice and concerns around levels of underinsurance in the Australian community.

2.13               The evidence of poor quality advice found by the ASIC Review justified further efforts by the Government and the industry to reform the remuneration arrangements in the life insurance industry.

Policy options and likely net benefits of the options

2.14               The FSI drew on the ASIC Review to inform its consideration of the problem of poor quality life insurance advice. The FSI recommended the implementation of a ‘level commission’ structure, whereby the upfront commission is not greater than the ongoing commission. It was argued that:

‘this would provide a balanced and cost effective approach to better align the interests of advisers and consumers. The remuneration model needs to be sustainable; otherwise there is a risk that providers may exit the market, making it more difficult for consumers to obtain life insurance advice.’

2.15               The FSI did not determine the percentage amount of the level commission that should apply in the life insurance sector as it considered that this should be left to the market and industry.

2.16               The Trowbridge Review recommended a remuneration model with the following key features:

•        an Initial Advice Payment (IAP) of $1,200 or, for customers with annual premiums below $2,000, no more than 60 per cent of the first year’s premium, payable once every five years; and

•        level commission at a maximum of 20 per cent of the premium.

2.17               Additional elements included: a continuation of existing arrangements for retention periods (‘clawbacks’) on the first year commission and IAP; reforms to Approved Product Lists (APLs) and Statements of Advice (SoAs); and the introduction of an industry Code of Practice.

2.18               Trowbridge argued that if advisers did not receive an initial payment beyond the ongoing commission, there would be a substantial mismatch between initial advice costs and the initial payment to advisers. This could lead to large numbers of financial advisers ceasing to offer life insurance advice, with the diminished supply of advice likely to exacerbate the underinsurance problem in Australia.

2.19               On 25 June 2015, the then Assistant Treasurer announced the reform package that industry had developed following the recommendations made in the Trowbridge Report. The proposals on commissions and remuneration of advisers included:

•        reduction in upfront commissions, going from a maximum upfront commission of 80 per cent of the first year premium from 1 January 2016, to a maximum upfront commission of 60 per cent of the first year premium from 1 July 2018. The maximum ongoing commission would be 20 per cent from 1 January 2016;

•        clawback over three years to apply from 1 January 2016;

•        ban on other forms of conflicted remuneration consistent with the FOFA reforms from 1 July 2016; and

•        life insurance companies to offer fee-for-service insurance products for those advisers who wish to operate on a fee-for-service basis.

2.20               The Government also announced further proposals relating to APLs, SoAs and an industry code of conduct .

Consultation

2.21               The FSI took initial submissions on the issues set out in the inquiry's terms of reference and a second round of submissions in response to its Interim Report. In developing the Government’s response, Treasury took submissions on the recommendations in the Final Report.

2.22               The Trowbridge Review received 137 submissions from the industry, consumers and other interested parties. Consultations were held with consumer groups, government agencies (ASIC, the Australian Prudential Regulation Authority and Treasury), individual advisers, licensees and insurance company executives.

2.23               The Government consulted on a regular basis with industry stakeholders throughout the policy development process. This included two industry roundtables involving the FSC, AFA and FPA following the Government’s announcement of its response to the FSI to settle the final details of the reform package.

Agreed Option

2.24               On 20 October 2015, as part of its response to the FSI, the Government announced it would support the retail life insurance industry’s proposed reforms as announced by the then Assistant Treasurer on 25 June 2015.

2.25               Following consultations with stakeholders on some outstanding issues, the Minister for Small Business and Assistant Treasurer announced the final reform package on 6 November 2015. This package included a revised commencement date of 1 July 2016, and a change to the clawback period from three to two years. The reform start date has subsequently been revised to 1 January 2018, following the lapsing of the Bill when the Parliament was prorogued on 15 April 2016.

2.26               A regulatory costing for the reform package has been prepared, consistent with the Government’s Regulatory Burden Measurement Framework. These costs are summarised in Table 1, noting that the 2016 offsets for the chosen option will be found from with the Treasury portfolio.

2.27               For life insurers, implementation costs include: IT costs, and updating of internal policies and procedures, including training courses. There are ongoing costs associated with monitoring compliance with the new regulations.

2.28               For large and medium sized licensees, there are 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.

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

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

 

Table 1: Regulatory burden and cost offset estimate table

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in costs

Total, by sector

$27.8

$0

$0

$27.8

 

Cost offset ($ million)

Business

Community organisations

Individuals

Total, by source

Treasury

-$27.8

$0

$0

-$27.8

Are all new costs offset?

Yes, costs are offset

Total (Change in costs - Cost offset) ($ million) = $0

Note: Offsets will be found for 2016 from the Treasury portfolio.

Implementation and Evaluation

2.31               Implementation of these reforms, which will commence on 1 January   2018, will be a joint effort between industry, ASIC and the Government.

2.32               The Government is amending the Corporations Act 2001 to give ASIC the power to create a legislative instrument to set caps on commissions and implement clawback arrangements. Ultimately, the final form of ASIC’s instrument will be a matter for ASIC, as the independent regulator.

2.33               The FSC has responsibility for creating the Life Insurance Code of Practice. Similar to existing codes for Banking and General Insurance, the Code would set out best practice standards for insurers, including in relation to underwriting and claims management. This work is already underway.

2.34               ASIC will conduct a review in 2021 to consider whether the new industry arrangements for life insurance advice have better aligned the interests of firms and consumers. ASIC has consulted with industry to ensure appropriate and reliable data will be available to support this review. If the review does not identify significant improvement, the Government will move to mandate level commissions, as was recommended by the FSI.



Chapter 3          

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016

3.1                    This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

3.2                   The amendments remove the current exemption in the Corporations Act from the ban on conflicted remuneration for benefits paid in relation to certain life insurance products.

3.3                   The Bill enables the Australian Securities and Investments Commission (ASIC) to make a legislative instrument to permit benefits in relation to life 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 upfront 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. 

3.4                   The Bill also applies a ban on volume-based payments in life insurance products and includes transitional (grandfathering) arrangements in the Corporations Act 2001

3.5                   An existing provision in the Corporations Act 2001 will be used to facilitate ongoing reporting to ASIC on policy replacement data. This data will assist ASIC in its scheduled 2021 Review of the new arrangements.

Human rights implications

3.6                    This Bill does not engage any of the applicable rights or freedoms.

Conclusion

3.7                    This Bill is compatible with human rights as it does not raise any human rights issues.



Schedule 1:  Removal of exemption to the ban on conflicted remuneration

Bill reference

Paragraph number

Item 1, paragraph 912C(1A)(e)

1.45

Items 2, 3, 5, 7, 10, 12, 14, 15, and 16, the definitions of ‘benefit ratio’ and ‘conflicted remuneration’ in section 960, the note to section 963A, subsection 963B(1), subparagraph 963B(1)(c)(i), subsections 963B(5), 963C(1), 963C(3), and 963D(4)

1.47

Item 2

1.48

Items 4, 11 and 13, section 960, subsection 963B(3A), subsections 963BA(1) and (2)

1.32

Item 4, section 960

1.26

Item 6, section 963AA

1.20

Item 8, sub-subparagraph 963B(1)(b)(iii)(A)

1.33

Item 8, sub-subparagraph 963B(1)(b)(iii)(B)

1.25

Item 8, paragraph 963B(1)(b)

1.17

Item 8, paragraph 963B(1)(ba)

1.23

Item 9, paragraph 963B(1)(c)

1.21

Item 11, subsection 963B(3C)

1.28

Item 11, subsection 963B(3B)

1.27

Item 13, subsection 963BA(3)

1.35

Item 13, subsections 963BA(3) and (4)

1.37

Item 13, subsection 963BA(4)

1.41

Item 13, subsection 963BA(2)

1.31

Item 13, subsections 963BA(2) and 963BA(4)

1.24

Item 13, subsection 963BA(1)

1.30

Item 17, section 1549A and subsection 1549B(1)

1.49

Item 17, subsection 1549B(2)

1.50

Item 17, subsection 1549B(3)

1.53