The Federal Government has been strongly urged to fix life insurance legacy product issues, with the Australian Prudential Regulation Authority (APRA) noting that legislative and regulatory efforts to resolve legacy product problems have lapsed for more than half a decade.
APRA has used its submission on the Life Insurance Framework filed with the Senate Economic Committee’s Scrutiny of Financial Advice inquiry to highlight the degree to which legacy life products remain a weeping sore for the life insurance industry.
“Over time, legacy products become more complex and expensive to administer and may no longer meet the requirements of the beneficiaries,” the submission said.
“Industry estimates suggest that approximately 25 per cent of all funds under management are in legacy products. The cost of these legacy products is ultimately borne by the policyholders.”
APRA said there were a range of “very complex legal, consumer and tax issues that arise if a life insurer seeks to move policyholders from a legacy product to a new product, restricting the ability of insurers to close legacy products”.
“The benefits of a simpler, though still robust, mechanism to rationalise legacy financial products has been recognised for some time,” the APRA submission said, noting that “between 2007 and 2010 Government worked with industry to develop a mechanism to facilitate product rationalisation”.
“However, such a mechanism was not finalised or implemented,” the submission said.
It said the mechanism would have facilitated rationalisation of genuine legacy products — “that is, not simply those that are performing poorly — subject to a ‘no disadvantage test’ for relevant
consumers. It would also have provided tax relief to ensure consumers were not disadvantaged as a result of triggering an early capital gains tax event”.
The submission said the Financial System Inquiry Final Report had recommended the development of an appropriate mechanism for rationalising legacy products and that the recommendation was accepted by the Government.
APRA continues to strongly support the need to comprehensively address this issue,” the submission said.
