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Thursday, 11 February 2016
Page: 1368


Ms O'DWYER (HigginsMinister for Small Business and Assistant Treasurer) (09:46): I move:

That this bill be now read a second time.

This bill amends the Corporations Act 2001 to better align the interests of financial advisers who sell life insurance products with their customers.

These changes represent the most significant improvements to the remuneration arrangements in the life insurance advice sector since the Wallis inquiry recommendations were implemented in 2001. Consumers will benefit through improved quality of advice as a result of better alignment of interests, more product choice and enhanced competition.

In introducing this bill today, the government is implementing part of our broader commitment to ensure better consumer outcomes from the financial system, as set out in our response to the financial system inquiry. It is the product of hard work and compromise on the part of industry and I want to publicly acknowledge and thank industry for their constructive engagement. This bill shows what can be achieved when government, business and the community come together to achieve better outcomes.

In particular I wish to specifically acknowledge the work of the Association of Financial Advisers, the Financial Planners Association and the Financial Services Council 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.

Following the final industry agreement of 6 November, 2015 the industry participants had this to say. 'Minister for Small Business and Assistant Treasurer the Hon. Kelly O'Dwyer's statement on the way forward on life insurance advice is a positive first step in lifting industry practices to improve consumer outcomes,' Financial Services Council Director of Policy Andrew Bragg said.

The Financial Planners Association (FPA) welcomed the industry package as 'fair and workable'. The CEO of the FPA, Mark Rantall, said: 'The government's final response to proposals by the Hon. Josh Frydenberg MP on 25 June and the FSI report is a sensible outcome that will help ensure the sustainability of the industry.'

The Association of Financial Advisers (AFA) acknowledged the timely and collaborative approach taken by the government. The AFA National President, Deborah Kent, said that the 'reduced clawback to two years brings greater fairness to the Life Insurance Framework' and is 'a great relief for our members, particularly those that own and operate small businesses'.

The life insurance sector is vital for our community. Life insurance advisers and product manufacturers help to provide essential financial security to Australians and their families.

However, recent inquiries have shown that there is a clear need for change in the sector.

A series of reports have identified a range of worthwhile improvements. These include a review by the Australian Securities and Investments Commission, otherwise known as ASIC, the Trowbridge Review commissioned by industry and the financial system inquiry.

The ASIC review identified a strong correlation between high up-front commissions in the sector and poor consumer outcomes, including high lapse rates where consumers are 'churned' through products. It also found unacceptable levels of poor quality advice. In particular, 45 per cent of cases reviewed involved high up-front commissions and failed to meet the relevant legal standard for financial advice. This is unacceptably high.

Rather than acting unilaterally, the government asked industry to respond to ASIC's review so that any reforms were driven by industry itself. The result of this was the Trowbridge review, chaired by industry veteran John Trowbridge.

The Trowbridge review recommended a package of reforms, including a significant reduction in up-front commissions to limit the inducement for advisers to write new products for consumers where the circumstances did not warrant it.

Further, the financial system inquiry recommended a complete abolition of the up-front commission model for life insurance advice and a move to level commissions where the commission is the same for each year of the policy.

Following these reports, the government called on industry to propose sensible and genuine reform. This bill gives effect to the reform package agreed by the life insurance industry.

While the Corporations Act broadly bans conflicted remuneration in the financial services sector, life insurance policies held outside of superannuation have been largely exempted from this ban.

This bill removes this exemption for life insurance advisers receiving conflicted remuneration, such as commissions, for life risk insurance products and enables ASIC to determine the acceptable benefits payable for these products.

Under the approach in the bill, advisers will be able to receive commissions for selling life risk products provided certain requirements are met. These requirements are twofold. Firstly, there is a cap on the size of allowable commissions. Secondly, they relate to 'clawback' arrangements, where a share of the up-front commission will be paid back to the life insurer by the adviser if a policy is cancelled or the premium is reduced.

I will take each of these requirements in turn.

Up-front commissions, which provide an incentive for advisers to replace or 'churn' policies where there is no consumer benefit, will be significantly scaled down. ASIC will have the power to ensure that they will go from an average of 110 to 120 per cent of the premium today to a maximum of 60 per cent from 1 July 2018. Permitted ongoing commissions will be set at a maximum of 20 per cent.

Currently, up-front commission arrangements are the dominant remuneration arrangement, covering 82 per cent of advisers.

It is not uncommon for up-front commission models to pay 110 per cent of a new business premium to an adviser with an ongoing commission of around 10 per cent.

By reducing the incentive to churn clients through products, the new commission structure will provide a better basis for advisers to give advice that is more appropriate to consumer needs.

Commissions will be calculated on the total of the product premium, the product fee and frequency loading (the extra amounts charged to make payments on a monthly basis rather than annually).

No caps will be placed on level commissions, or on fee-for-service arrangements as these arrangements are less likely to result in an incentive to provide inappropriate advice.

The second element of permissible payments relates to clawback requirements.

Clawback refers to the share of the up-front commission that will be paid back to the life insurer by the adviser if a policy is cancelled (or the premium is reduced). Under the industry agreement an insurer may recover 100 per cent of a commission from the financial adviser in the first year of a policy and 60 per cent in the second year.

The clawback provisions will significantly reduce the incentive for advisers to unnecessarily replace policies after the expiration of the first year of the policy. At the same time, advisers will not be required to pay back the full amount of the up-front commission earned if the policy lapses in the second year of the policy.

The government has responded to industry concerns about ongoing business viability by moving from a three-year to a two-year clawback period. However, through these reforms the government is ensuring that there are strong incentives to prevent replacement of policies where there is no consumer benefit.

The bill gives ASIC the power to create an instrument which covers acceptable commissions and clawback amounts. The government acknowledges that the final form of the instrument is a matter for ASIC, as the independent regulator.

Payments made to advisers by insurers on or after the commencement day come under the new legislation. The new legislation also applies to payments made to advisers under policies entered into before the commencement day but where the product is issued after the commencement day, subject to a three-month grace period.

The bill contains provisions which grandfather certain payments. These provisions are consistent with those introduced as part of the Future of Financial Advice laws and allow certain arrangements to continue to be subject to attract the current commission levels.

These legislative changes strike the right balance between protecting consumers and recognising the need for ongoing business viability and industry stability.

The government believes that consumer interests will be best served by a competitive life insurance sector which delivers products appropriate to consumer needs and includes both small and large participants.

Being such a significant reform to the sector, government understands that it is important for business to have time to adapt to this change. That is why there are transitional provisions which scale down the maximum permissible up-front commission over three years.

Following a four-week consultation period on the draft legislation, over 20 submissions were received. I thank people for their views and for taking the time to contribute to the development of this legislation during this time and part of the earlier reviews.

Industry also has a role to strengthen the quality of advice and insurer practices. The Financial Services Council will develop a life insurance code of conduct to set best practice standards for insurers. In addition, the life insurance industry will develop a new industry standard to widen approved product lists to broaden the choice of products available to consumers.

ASIC will undertake a review of the reforms in 2018. If this 2018 review does not identify significant improvement in product churn and the quality of advice, the government will move to mandate level commissions, as was recommended by the financial system inquiry. The bill enables ASIC to collect necessary information from industry to monitor and enforce the reforms, including in electronic form.

ASIC will also conduct a broader review of statements of advice. The objective of this review, which will commence in the second half of 2016, is to make disclosure simpler and more effective for consumers, as well as assisting advisers to make better use of these documents. The review will also consider whether the disclosure of adviser remuneration could be made more effective, including through prominent up-front disclosure of commissions. The government will look favourably at any recommendations to achieve these aims.

The full details of the amendments are contained in the explanatory memorandum. I commend the bill to the House.

Debate adjourned.