The Financial Planning Association (FPA) has released a consultation paper around life insurance calling for upfront commissions to be capped at four times the level of ongoing payments with insurers offering dial down commission to promote fee for service insurance advice.
In the paper sent to members the FPA also suggests a responsibility period of two years, the banning of volume-based payments, rebates, profit sharing and shelf space fees for life insurance products and a three year transitions period to the new commission model.
The suggestions are part of 10 point ‘Life Insurance Blueprint’ which has been drawn together through consultation with the FPA Board, committees and members.
It will be open to further comment by FPA members for a week with the blueprint forming the FPA’s official response to the Government’s call to action since the release of the Trowbridge Report.
FPA chief executive Mark Rantall said the association had rejected the changes suggested in the Financial System Inquiry final report and has instead pushed for consumer focused changes.
“The FPA wants sustainable change in the life risk sector through higher professional standards and by improving the public perception of the life risk advice service offering,” Rantall said.
“The form of regulation proposed in the FSI Final Report would only serve to benefit life insurance providers and potentially push more Australians away from life insurance coverage due to the failure of addressing the real structural issues within the industry.”
He said the shift to upfront payments to be capped at four times ongoing payments recognised the initial work done by advisers when dealing with life insurance.
“Remuneration for insurance work should be compensated commensurate to when the work is undertaken, in an open and transparent manner. Given that most of the work involved in putting insurance policies in place through a SOA and underwriting is in the establishment phase, this would preclude support for a flat or level commission structure.”
The 10 points of the FPA Life Insurance Blueprint are:
1. There is a need for commissions to remain. It enables those Australians who are least able to afford fees and need insurance protection the most, to obtain quality advice and appropriate cover.
2. Commissions need to be higher initially, which reflects the costs of providing initial advice and implementing cover. A lower ongoing commission allows consumers to access review advice and encourages retention of policies — it is our view that the upfront work is often 4 times more than annual reviews. Therefore an upfront payment capped at 4 times the ongoing commission payment would be appropriate.
3. As part of an effective commission model advisers should be partly responsible for the ongoing retention of the policy. We propose that commissions be able to be reversed for up to the first two years of a new policy.
4. A transition period of no more than three years to the new commission model.
5. To promote fee-for-service for insurance, life insurance companies should be required to develop and implement options for financial planners to dial down commission from the product, and dial in a separately identified adviser fee.
6. Ban other forms of Conflicted Remuneration. This includes banning volume-based payments, rebates, profit sharing and shelf space fees.
7. Remove heavily restricted approved products list (APL). Life risk products should be competitive on the basis of their suitability to the client, and financial planners should be supported in meeting their best interest duty.
8. Life insurance companies should be required to pass on savings in the form of premium reductions and sustainable premium pricing structures across all channels including retail, group and direct.
9. There needs to be stronger enforcement. The industry needs to work better with the regulator to monitor and enforce poor life insurance advice practices that do not meet the best interest duty. A system should be established where life insurance companies are required to report financial advisers that are churning insurance policies to the regulator for review. This should be incorporated in a life insurance code.
10. We are to provide better training and guidance support for financial planners who provide life risk advice. They should be required to complete life risk training such as the Life Risk Specialist accreditation and should be provided with guidance on best practice, when providing advice on life insurance.
