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The Financial Planning Association (FPA) has found no evidence of mis-selling of life insurance that would justify a ban on commissions, stating that the only beneficiary of the ban would be the Government.
“No one has been able to articulate to me what the problem is with insurance commissions,” said newly appointed FPA chief executive Mark Rantall.
He said the only negative with insurance advice was policy churning by advisers, which was something that actually benefitted clients to the detriment of insurance companies.
Deputy chief executive Deen Sanders said the FPA Board investigated the issue thoroughly before taking the stance not to support a ban on insurance commissions, adding that it found no evidence that commissions led to insurance products either being oversold or that clients were sold inappropriate products for their needs.
Sanders said complaints to the Financial Ombudsman Service regarding insurance claims revealed that advice actually had a positive impact.
“At the moment in time that a client had a dispute with an insurance company, their very best friend was their adviser fighting on their behalf as part of that process,” he said.
“On the weight of evidence, the FPA board had to make a decision that there was no obvious justification to ban commissions in life insurance.”
Sanders said there were a number of things that needed to occur in the marketplace before a ban on insurance commissions could be considered, which included possible level commissions but more importantly better product features and improvements in the way insurers handle claims.
“There’s a challenge to the product community in that particular space,” he said.
Sanders added that the Government also needed to consider tax deductibility for insurance advice, as currently the only beneficiary in a fee-for-service environment would be the Government.
“There’s real issues around the idea that fee-for-service would deliver a windfall for the Government, but not deliver a windfall to the consumer. So we want to see the balance adjusted here,” he said.
Rantall said no one really understood enough about the distribution of insurance and the effect that removing commission would have on distribution.
He said an average policy of around $2,000 had a commission of about $500, and yet the work involved in doing a fact-find, putting a Statement of Advice in place and getting some underwriting done amounted to about 10 hours.
“At a charge-out rate of roughly $200 an hour, that’s $2,000 worth of work to actually put that insurance in place … and someone has got to write out a cheque for that,” he said. “My sense is that people will steer away from that.”
Rantall said while the mass affluent and the high-net-worth might fare better, he worried that the average person (who the Government asserted it was trying to help) would in fact be disadvantaged.
“That’s why I say I don’t think we know enough about the dynamics of insurance,” he said.
