The proposed life insurance framework (LIF) legislation that was introduced into Parliament at the end of November 2016 has loopholes and unintended consequences, and fails to include regulatory guidelines on certain aspects, according to a financial services lawyer.
imac legal and compliance principal lawyer, Ian McDermott, noted that the explanatory memorandum of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill said it would remove the exemption from the ban on conflicted remuneration on certain life insurance products, while all benefits paid on life insurance inside or outside superannuation would face bans on conflicted remuneration.
However, he argued that benefits paid within the prescribed benefit ratio and clawback requirements would still be exempt.
"Pre-existing policies (i.e. those that are in place prior to LIF starting) will effectively be grandfathered, although it must be said that this creates its own conflict as advisers would have an incentive to write new policies to existing clients so they can earn an upfront commission as well as (generally) higher ongoing commissions from the new product," McDermott wrote in a blog post.
"This is a strange outcome for legislation that is supposed to do away with such conflicts."
McDermott also noted that while the LIF rules contained clawback provisions, they did not have regulatory guidance on how those rules would apply if there was a change of adviser and/or licensee between the start of the policy and cancellation/clawback.
While he remained hopeful the corporate regulator would create rules around this in the future, he argued this should have been clarified earlier in the Act or in regulations given the importance of the issue.
The bill also allowed for clawback provisions to be avoided if the adviser "merely engaged" in an ongoing program of rebates to clients, no matter how small, in order to encourage clients to purchase or to continue holding the insurance product for two years.
McDermott also said it was "anomalous" for the government to have eliminated the carve-out in the law for direct insurance sales, and said it was not clear why the framework even dealt with non-advice related benefits, regardless of whether the benefits paid were below the newly prescribed ratio of 80 per cent as of 2018.