LIF bills riddled with holes

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.

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"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.

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What a fine upstanding individual Mr McDermott is.
HIs initial comment that advisers will be able to replace pre-existing insurance products before LIF, contained in the "clawback provisions completely ignores the now legislated client "Best Interest" Test !
Further, as far as the current flawed LIF legislation exists,in relation to the 2 year "clawbacks" rules are concerned, any business written back will fall back on the Licensee where the original business was writtenthrough.
Is this ideal ... well absolutely not but the the only way forward for AFSL's to protect themselves is to retain that amount of commission repayable over the "clawback" periods. No one will write this business and for those who harbour the absurd notion that a "fee for service" is the best option, try telling the client that should pay more than 50.0% more than they otherwise would for that option.
Mr McDermott, you seem like an ambulance chaser and fortunately we can count our lucky stars that with the likes of Gordon & Slater, etal, there are not many like you in the legal fraternity.

Clawback has always rested with the servicing adviser and hence the dealer group. Nothing has changed, why the concern because of LIF?

@ Chris,
How can the "clawback" rest with the servicing adviser if he wasn't the person who wrote the business in the first place. What if the original adviser sold his business and left the industry ?
It falls back on the the current Licensee if there is a "clawback ".
What that means going forward is that AFS Licensee's will need to retain earned commissions on all business until the "clawback" responsibility ends, otherwise they will be stuck with the debit.
So tell me,... how many advisers do you think will want to wait up to 2 years to be paid for work they did today ?
I hope this comes back to bite the members of the FSC on the rear end !

Hi Alleycat, I think you're a little confused about this. Chris is right, the clawback rests with the servicing Adviser at the time that policy is cancelled, not the Adviser who wrote the policy. In your example if the original Adviser sells the business then the new Adviser is responsible for the clawback. If you take over a policy that someone else wrote then you take over responsibility for the clawback even though you never received the initial commission. Clawbacks have nothing to do with the licensee unless the policy somehow becomes an orphan policy with no Adviser attached, otherwise there will always be an Adviser attached who wears the responsibility.

@ Brett H,
Sorry but I don't agree with your summation.
In fact as a Director of an AFSL, all commissions are initial paid to the Licensee and not the adviser direct.
They are then credited to the adviser concerned. If the debit goes back to the Licensee, then it's more than likely that AFSL will pick up the tab,
These issues were raised by McDermott in what happens if there's a change of adviser/Licensee during the cancellation/clawback period.
What I have said is an unintended consequence of this flawed legislation.

I'm changing afsl! Mine certainly takes it back. What would the commercial sense be of picking up the tab? The adviser has made a mistake haven't they by not cancelling the insurance prior to it being transferred to their register?

Alleycat, LIF doesn't bring with it any change to how the clawback system currently works. You are obviously correct that the debit goes to the licensee first, but it goes to the licensee of the current servicing Adviser, so the licensee will always have an Adviser to pass it on to. I learnt this the hard way, I was working for another Adviser and then left and started up my own business. The previous Adviser allowed me to take some clients with me, family/friends etc, one of them cancelled their policy shortly after and I wore the clawback for the upfront commission I never received. There are many issues with the clawback provisions but this is not one of them.

Brett you are completely correct, have had the same occur a number of years ago and learnt my lesson. The insurer doesn't care if you were the originating adviser or not, if you are the servicing adviser at time of cancellation they deduct from the AFSL payment, where they in turn deduct from you (and if you're self licensed it's a moot point really isn't it?). The only way this would change is in a change of procedure b the insurance organisations, and that won't happen as it would be more costly and cumbersome for them.

@ Brett H,
I think you were conned, unless it was something in the original purchase agreement making you liable.
Under those terms. I wouldn't have agreed to anything unless there was a retention of the purchase monies which would be paid at the end of any clawback period on each policy.
Legally you can't be responsible for something you didn't do, or something you didn't receive.
You can be liable though for not doing something you should have done,... and didn't.
I hope you can tell the difference.

Alleycat, just look at the Adviser Guide for any of the major insurers and you'll see that the claw back applies to the servicing or commissionable adviser at the time of the lapse.

@Brett H.
I understand that arrangement because that's the life company's first and last port of call.
However, the things I put in my previous post about retention of monies and the going rate is about 30.0% of the original purchase price to cover any cancellation/lapses over a "clawback period which up until now has been 12 months, is considered normal.
If the seller isn't prepared to go down that path, why would you buy a business that may not be worth say a 3 time multiple of recurring revenue.
"Caveat emptor"... has limitations !

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