The Financial Services Council (FSC) has announced it would consult with the industry on a policy to address the practice of churning in life insurance.
FSC chief executive John Brogden said the association had recognised that only a small proportion of financial advisers churn life insurance policies, "however, we believe it is a serious issue which is significant enough to warrant industry action".
The new policy would see financial advisers only being paid level commission if ‘replacement business’ is arranged.
According to the FSC, replacement business occurs where a financial adviser makes arrangements for a client to replace an existing individual life, lump sum benefit or income protection policy with a new policy of the same kind within five years from the commencement date of the original policy.
FSC’s policy on churn would also see the removal of ‘takeover terms’ for a policy or a group of policies that are transferred by a financial adviser between insurers.
"The clear aim of this policy is to support the statutory requirement for advisers to act in the client’s best interest, improve the affordability of premiums for consumers and improve trust in the life insurance industry and the advice profession," Brogden said.
"These measures recognise that individual circumstances can change and it may be appropriate for an existing policyholder to increase the level of cover already held for any particular life insurance product within five years of issue," he said.
However, Brogden acknowledged that the measures are not intended to limit or prohibit alternative payment structures that may exist for retail life insurance advice, including fee-for-service models.
The FSC will consult with financial advice and life insurance industries on the policy and aims to implement framework by 1 July 2013.
