The Federal Government has introduced legislation to the Parliament to underpin the new Life Insurance Famework (LIF).
Financial advisers and others affected by the legislation will have an opportunity to make further submissions on the shape of the new working environment when the Government opens a consultation period around the associated regulations.
The Assistant Treasurer, Kelly O’Dwyer said the legislation “built on the government’s commitment to better align the interests of financial firms and consumers by addressing the conflicted remuneration arrangements that were exempted under the Future of Financial Advice (FOFA) reforms for life insurance”.
“Currently life insurance advisers are paid high up front commissions up to 120 per cent of the first year premium with low trailing commissions. This can provide a financial incentive to advisers to replace policies even where there is no consumer benefit,” the minister said.
O’Dwyer outlined the core elements of the LIF changes to begin from 1 July, this year, as being:
- a three-year phase-down of upfront commissions paid to advisers to a maximum of 60 per cent from 1 July 2018, together with the introduction of a maximum rate for ongoing commissions of 20 per cent; and
- the introduction of a two year commission ‘clawback’ period, which will clawback 100 per cent of a commission in the first year and 60 per cent of a commission in the second year should a policy lapse.
She said the need for the changes had been identified in the 2014 ASIC Review, the Financial System Inquiry (FSI) and the industry-initiated Trowbridge Report.
“I would like to recognise the considerable efforts, in particular by the Association of Financial Advisers, the Financial Planners Australia representing nearly 15,000 advisers, and the Financial Services Council representing life insurers for developing an industry based response,” O’Dwyer said. “These changes strike the right balance between consumers of life insurance while recognising the need for business viability and industry stability.
“To ensure the reforms are implemented as efficiently and effectively as possible, the Government will also consult on the regulations that will support the legislation,” Minister O’Dwyer said.
The Australian Securities and Investments Commission (ASIC) will be responsible for implementing the commission caps and clawback arrangements, and will review the sector in 2018 to determine the effect of the reforms. If significant improvements are not identified the Government will move to mandate level commissions, as recommended by the FSI.
