Trowbridge recommends level commissions

Life/risk advisers are facing substantial changes as a result of the final recommendations of the Trowbridge report involving a three-year transition to a level commission environment entailing an Initial Advice Payment topping out at $1200 and a five-year rule.

Life insurance companies will have to sign up to a code of practice while licensees will have include at least half of the authorised retail life insurance providers on their approved product list (APL).

The Trowbridge recommendations resulting from the Review of Retail Life Insurance Advice chaired by former Australian Prudential Regulation Authority (APRA) executive, John Trowbridge, has recommended a move away from the current heavily criticised regime based on substantial upfront commissions.

In its place he has recommended the following regime to be phased in over three years.

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A Reform Model that can be described as level commissions supplemented by an Initial Advice  Payment available at a client's first policy inception and then no more often than once every five years, where:

• the level commission is a maximum of 20 per cent of premiums;
• the Initial Advice Payment (IAP) is paid by the insurer to the adviser on a per client basis (usually the insured life);
• the IAP is available to the adviser when a client first takes out a life insurance policy and then no more often than once every five years (the "five year rule"); and
• the IAP is a maximum of $1,200 or, for customers with annual premiums below $2,000, no more than 60 per cent of the first year's premiums.

Further, to support the integrity of the Reform Model, it is recommended that:

• the IAP be available only on advised business (i.e. for personal advice only and not available for general advice, either through direct sales or other agency sales or through group life
• policies inside superannuation funds);
• existing arrangements for retention periods (‘clawbacks') apply to commission on the first year's premium and to the IAP if there is one;
• all commission or other payments from insurer to adviser be fully transparent to the client with the adviser disclosing clearly whether any insurer payments represent full, partial or nil
• commissions; and
• the adviser and client remain free to agree on fees for service that are additional to the insurance premium.

According to Trowbridge, the single IAP is intended to address the problem of an adviser having a financial incentive to replace a client's existing policy with a new one, because it will mean that when new policies are written for existing advised clients, no payments beyond the level

commission are made until at least five years after the last IAP was paid.

He explained that setting the IAP at $1200 was intended to make a contribution to cost recovery for advisers while falling short of full cost recovery, which was variously estimated at between about $1500 and $3500 per client.

"It is aimed at delivering a balance between acknowledging the initial costs of advisers and eliminating any behavioural doubt as to whether the client's interests are being placed ahead of the adviser's own interests," he said.