Explanatory Memorandum
(Circulated by the authority of the Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)General outline and financial impact
Overview
Schedule 1 to this Bill makes amendments to the Corporations Act 2001 (Corporations Act) to give effect to industry's life insurance reform package; the final details of which were announced by the then Minister for Small Business and Assistant Treasurer, in a media release titled 'Government Announces Significant Improvements to Life Insurance Industry' on 6 November 2015.
The Bill was previously introduced into the Parliament on 11 February 2016; however, the Bill lapsed at prorogation on 15 April 2016.
The purpose of these reforms is to better align the interests of consumers with those providing advice.
The Bill removes the exemption in the Corporations Act from the ban on conflicted remuneration for benefits paid in relation to certain life risk insurance products (life insurance). The scope of the amendments contemplated by this legislation covers situations where life insurance sales involve the provision of either personal or general financial advice. This means that the amendments include the sale of life insurance through direct sales channels. The Bill also includes the power for regulations to prescribe other circumstances where a benefit paid in relation to life insurance is conflicted remuneration even where no advice is provided.
The Bill enables the Australian Securities and Investments Commission (ASIC) to make a legislative instrument to permit benefits in relation to life insurance to be paid, provided certain requirements are met. These requirements relate to the quantum of allowable commissions and to 'clawback' arrangements, where a certain portion of the upfront commission is paid back to the life insurer by the financial adviser if the life insurance policy is cancelled or the premium is reduced.
The Bill also applies a ban on volume-based payments to life insurance and includes transitional (grandfathering) arrangements in the Corporations Act.
An existing provision in the Corporations Act can be used to facilitate ongoing reporting to ASIC on policy replacement data. This data will assist ASIC in its scheduled 2021 Review of the new arrangements.
Date of effect: The amendments take effect from 1 January 2018.
Proposal announced: The proposal was announced by the then Minister for Small Business and Assistant Treasurer by media release on 6 November 2015.
Financial impact: Nil.
Human rights implications: This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 3.
Compliance cost impact: $27.8 million annually.
Summary of regulation impact statement
Regulation impact on business
Impact: The amendments to the Corporations Act impact life insurance companies, financial advisers and consumers of life insurance.
Main points:
- •
- The Government has been informed of the regulatory impacts of various reform options by the findings of three independent reviews - ASIC's review of retail life insurance advice, the Review of Retail Life Insurance Advice (Trowbridge Review) and the Financial System Inquiry (FSI) - as well as through targeted consultations with industry stakeholders.
- •
- ASIC found unacceptable levels of poor quality advice, and a strong connection between upfront commissions and poor consumer outcomes, including in situations where the recommendation was to switch products.
- •
- Alternative reform options included a level commission model (proposed by the FSI) as well as a model consisting of an Initial Advice Payment and level commissions of 20 per cent of premiums (proposed by the Trowbridge Review).
- •
- In 2021 ASIC will conduct a further review to consider whether the new industry arrangements for life insurance advice have better aligned the interests of financial firms and consumers.