Churn: Real or politically expedient?
Was the life insurance industry ever really guilty of "excessive" churn or was churn a means to a politically-motivated end?
Notwithstanding any consumer benefits which might ultimately flow from the legislation underpinning the Life Insurance Framework (LIF), risk advisers have every right to be annoyed by the Australian Securities and Investments Commission (ASIC) statement that not all churn is bad.
Their annoyance is justified because throughout the nearly half-decade that the remuneration of life/risk advisers has been under scrutiny, neither ASIC nor the life insurance industry itself have managed to appropriately define what "churn" really is.
ASIC has always insisted that levels of "churn" are high in the Australian life insurance industry without actually quantifying what makes up churn, while life/risk insurers have always insisted that instances of genuine "churn" are relatively low and that the culprits are readily identifiable by the life insurers and particularly the business development managers.
In November last year, ASIC's most senior executives appeared before the Parliamentary Joint Committee on Corporations and Financial Services and took a number of questions on notice, all of which were answered just two days before the regulator's Christmas shutdown.
Contained in one of those answers was the confirmation that ASIC was "receiving data from life insurance companies about churn by financial advisers" — something which would enable the regulator to "monitor overall levels of churn in the life insurance advice industry".
"However, it is important to note that churn is not in itself a breach of the law because it may well be in the client's best interests to change life insurance policies. Therefore, data on churn is not a direct indicator of the level of compliance in the life insurance advice industry," it said. "At this point, ASIC is primarily using this data to identify advisers who may be providing non-compliant advice and should be subject to surveillance."
In other words, ASIC has confirmed that the life insurers are, indeed, the key repositories of data on "churn" but just because an insurance policy has been changed or lapsed, does not mean that "churn" has actually occurred.
It would now seem far too late for the Government to significantly amend the legislation underpinning the LIF even if it wanted to, and given the tortuous processes which led to the insurance and planning industries devising the framework, there is absolutely no likelihood of them returning to the drawing board.
However ASIC's admission to the Parliamentary Joint Committee on Corporations and Financial Planning raise serious questions about the evidence upon which it based its initial forays against life/risk adviser remuneration and the political influences which may have been at play.
What is not in question is that the real impetus for change was generated by a letter from the then Minister for Financial Services and now leader of the Opposition, Bill Shorten, in 2013 in which he referenced the existence of "churn" and the need for a self-regulatory approach.
That letter referred to ASIC continuing "to consider excessive churn to be a genuine issue in this sector of the industry", adding: "Consistent with my announcement, my preference is for a form of industry self-regulation in this area".
Shorten's letter has to be viewed in the context of the Labor Government having successfully pursued the implementation of the Future of Financial Advice (FOFA) changes and the anger of its industry fund constituency that advised life/risk had been quarantined from the FOFA ban on commissions-based remuneration.
Irrespective of the reality of the "excessive churn" referred to by Shorten in 2013, it contributed to the delivery of a political objective, the effects of which are still being felt.
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