LICG slams direct carve-out

7 July 2016

Advisers have become competitors to group and direct insurance, which might explain why the Financial Services Council (FSC) went behind the backs of industry groups and the Government to arrange a carve out for direct.

Such was the suggestion from risk adviser group, the Life Insurance Customer Group (LICG), which has once again attacked the FSC for its role in creating the Life Insurance Framework (LIF).

It also suggested the FSC did not want unaligned advisers reviewing insurance offerings in the retail market as well as other distribution channels.

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"When you consider that insurers are no longer dependent on advisers to get their product to market, the connection between fewer advisers and direct becomes obvious," the group said.

"If you don't want consumers to know the facts about all the insurance alternatives, it is easy to see why some advisers may be perceived as ‘getting in the way'. That's why industry super funds might think advisers are getting in their way too."

The group also accused the FSC of misusing market power to eliminate competition, adding that the direct carve-out was not an accident. It also noted Assistant Treasurer, Kelly O'Dwyer, had reported on the agreed LIF reforms by all industry bodies, and it included all channels of retail distribution, personal advice, general advice, and direct.

"Yet, in submissions to the Senate enquiry into the LIF Bill, both the FSC and ASIC [Australian Securities and Investments Commission] expressly noted that direct was excluded from the ‘reforms'. This was tucked away inside government submissions, perhaps no-one was supposed to notice," the LICG said.

The group also noted the FSC had not responded publically to a media release by the Association of Financial Advisers (AFA) on the direct carve-out.

Furthermore, the group asked for comment from Treasury since O'Dwyer's media and Parliamentary reporting on LIF was based industry agreement and the independent Trowbridge process.

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Geez this makes my blood boil, why should someone that dosen't even give advice get treated differently! What is wrong with this self serving FSC? The FSC knows direct clients lapse more and have less successful claims than advised clients. Its just greed, this is all this is. This LIGC, they have guts and lots of experiance in the industry , everyone get on board lets stick it to the FSC, they have had it too easy for too long they need to be stood up to! My dealership is part of the FSC why the hell would they support this? As they want to go direct to clients too to cut down costs and sell in house product?

Hi TJ, Unfortunately, like the wealth management industry the life insurance industry was consolidated by the banks during the 2000s and it is now an oligopoly market structure.

Oligopoly market structures differ from other market structures (monopoly, monopolistic competitive and competitive) in that the oligopoly market structure cannot increase customer prices with ease like a monopoly can. An oligopoly market structure faces a kinked demand curve. With a kinked demand curve profit and a barrier to entry is created by lowering input costs rather than raising consumer prices. Therefore, the game of the life companies (banks) is to screw the suppliers. Screwing the suppliers (advisers) in the life insurance industry is occurring in three ways.

1. Technology gains are making it cheaper and easier to distribute product directly to consumers;

2. The best interest duty under FOFA legislation says that we have to "take any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances." As such we are legally bound to provide advice on a client’s life insurance needs no matter what the client wants. Therefore, life insurance companies do not have to make it as attractive under FOFA for advisers to provide life insurance advice as we are forced to do it regardless. The banks never complained about FOFA did they??????

3. The LIF reforms are not about “churn”. Churn was the excuse used to implement a government backed form of collusion where all life insurance companies collectively acted through the FSC to equally lower their input costs (adviser commissions). Worst of all this was done by a Liberal government. We are supposed to be a free market capitalist economy, but in this case, the government is setting the price paid to life insurance advisers at the bequest of big business.

Financial advice that relies on product for revenue will be squeezed to a bare existence just like the dairy farmers are as suppliers to the supermarket industry. This is the nature of an oligopoly market structure.

Some great points there Tony

@ TJ
Perhaps it's time for you to look for an independently owned (by the advisers) boutique AFSL that allows you to have a say in how the License is run and is profitable.
Otherwise your trade off is to be part of a bigger AFSL that is a member of the FSC and doesn't really care about you or your clients reality.

Alleycat when we joined it was a lot different to now, its them not we now as they are a lot bigger these days. I am looking at other groups, including adviser owned groups. Thing is this was an adviser owned group but they turned all corporate and self interested due to chasing money for the licencee itself to pay their inflated wages at head office. The hunt continues!

TJ you should consider getting you own AFSL. It is not as difficult or as expensive as many in the industry would like you to believe.

Hi Tony, I have done some cost comparisons and in 5 years if I meet my goals I will be in the good position to take on my own AFSL. I need to join others at the moment though just due to economies of scale as its just me at this time in the office, I do everything, soas, fact finds, service clients the whole shebang, I have no support staff, yes I can outsource however I am a bit of a control freak. Alleycat and Tony ,you both offer good advice thank you and have a nice weekend

@ Tony
I agree with your comments to TJ but there is even more sting in the tail with the "Best Interest test".
ASIC expects every adviser to calculate if you put Stepped Term insurance into superannuation, how much the account balance may be depleted by doing that,.... to retirement.
It also expects advisers to do a comparison of Stepped v's level rates over the life of the contract.
I wonder how many advisers actually show the figures in some weird cashflow analysis predicated on the fact that it does not consider
1. Potential premium movements up or down or how long the client may even retain the contract in the first place.
2. Possibly new and better contracts that may come on the market.
3. Whether or not client circumstances may change and the need for Life cover either in the amount being insured for will alter, remain the same, increase or decrease, throughout the term of the original contract.

Hi Alleycat, I would suggest that very few advisers go to the level of detail that would be required to hopefully meet the best interest duty. I say hopefully because it is so open ended that no one knows what it would take to pass the test.

There's been plenty of those and some of my co Directors/Advisers were part of that kind of scenario and regret every part of it.
I can tell you now, none of us will go down that path again.
We are a small group but there's a lot of quality in the group.
There is no room for egos, everyone is valued and everyone has a say in how we operate. That's why I likened it to a collective.
We are extremely selective in who joins us.
If you want to know more let me know how you want me to contact you.

I'm in the same position as you and have been since 1996 since my ex associate, a Barrister and I parted company.
Like you, I want to control everything that goes out of my office.
The issue is the relationships I have developed with my clients and the accounting referral base that I have.
The other issue which is what we all face in many instances is the trust that allows you to work in a reasonable environment and a Licensee who understands both you and your business.
Having been in a couple of institutional organisations and experienced the things you are now experiencing, my decision was easy because I wanted my current AFSL to be my last change, and it is.
Y'all have a nice weekend but let me say finally, do your homework like I know you will, because there are always options.

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