Second Reading SpeechMs O'Dwyer (Minister for Revenue and Financial Services)
That this bill be now read a second time.
This bill amends the Corporations Act 2001 to better align the interests of life insurance advisers and consumers. In doing so, the bill acts on this government's response to recommendation 24 of the financial system inquiry, the root-and-branch review commissioned by this government in late 2013.
Specifically, the bill addresses the current conflicted remuneration of life insurance advisers who typically receive high up-front commissions, in many cases between 100 per cent and 130 per cent of premiums and low trails of 10 per cent, which incentivises policy replacement where there is no consumer benefit.
The life insurance sector is vital for our community. Life insurance provides essential financial security to Australians and their families at their time of greatest need. However, the life insurance sector can only fulfil this role in an effective manner when consumers have confidence that they are being placed into products appropriate to their circumstances.
Conflicted remuneration was prohibited by the Future of Financial Advice reforms in 2012. However, life insurance sold outside of superannuation was exempt. Subsequently, three reports have considered remuneration structures, the life insurance advice and the impact on consumers-namely, ASIC's review of retail life insurance advice, the financial system inquiry and the industry commissioned Trowbridge Report.
The ASIC review found unacceptable levels of poor quality advice and a high correlation between poor advice and up-front commissions, including high lapse rates where consumers are churned through products. Specifically, 45 per cent of cases reviewed involving high up-front commissions failed to meet the relevant legal standard for financial advice. Subsequently, the industry commissioned Trowbridge Review recommended a package of reforms, including a significant reduction in up-front commissions to limit incentives for advisers to inappropriately replace life insurance products or churn. Further, the financial system inquiry recommended a move to level commissions, where the commission is the same for each year of the policy.
The government asked industry to respond to these reviews, and I want to publicly thank them for their constructive engagement and hard work in developing the agreement that underpins the reforms introduced in this bill. This bill shows what can be achieved when government, business and the community work together to improve consumer outcomes.
In particular, I wish to thank the Association of Financial Advisers, the Financial Planning Association of Australia and the Financial Services Council. Each organisation has compromised and in working together have developed a reform package that will benefit life insurance customers through the provision of more appropriate advice and promote the long-term sustainability of the industry.
This bill removes the exemption from the ban on conflicted remuneration for advice on life insurance products and provides ASIC with the power to determine acceptable benefits payable for these products. Under this approach, advisers will be able to receive commissions as long as the requirements set by ASIC in its legislative instrument are met. This will involve meeting two main requirements. Firstly, there will be a cap on the size of allowable commissions. ASIC will have the power to lower these commissions from around 100 to 130 per cent today, to a maximum of 60 per cent from 1 January 2020. Ongoing commissions will be capped at 20 per cent from 1 January 2018. Secondly, these remuneration arrangements will include claw-back arrangements provisions under which part or all of the up-front commission will need to be repaid if the policy is cancelled or the premium reduces in the first two years. The bill gives ASIC the power to create an instrument which covers acceptable claw-back amounts.
The government acknowledges that the final form of the instrument is a matter for ASIC as the independent regulator. It is important to note, however, that there are no caps nor claw-back arrangements for policies sold by level commissions or on a fee-for-service arrangement as these arrangements are less likely to result in an incentive to provide inappropriate advice to consumers.
The government has continued to listen to feedback raised by industry and key stakeholders during consultation on the life insurance reforms. Firstly, the government has moved from a three-year to a two-year clawback period in response to concerns about ongoing business viability.
Secondly, the government has amended the commencement date of the reforms to 1 January 2018. This will enable the government to remove the generous grandfathering that was available under FoFA, which allowed advisers to continue to receive conflicted remuneration for the length of their enterprise agreements plus an additional 12 months.
The government wants these reforms to start as soon as possible and to apply equally to all advisers, whether they own their own small business or they are employed by a major bank. To achieve this, the reforms will commence 12 months after the entire reform package is settled. This will provide advisers with 12 months to renegotiate their collective agreements to be consistent with the new legislation.
The bill also enables the regulations to ensure that sales of life insurance that do not technically involve advice are captured by the reforms. The intention of this regulation making power is to ensure that all life insurance distribution channels are treated equally under the law and to maintain the integrity of the reforms by providing a flexible mechanism to address avoidance mechanisms into the future.
These legislative changes strike the right balance between protecting consumers and recognising the need for ongoing business viability and industry stability. The government believes that consumer interests will be best served by a competitive life insurance sector that delivers products appropriate to consumer needs and includes both small and large participants.
Being such a significant reform to the sector, the government understands that it is important for business to have time to adapt to this change. That is why there are transitional provisions which scale down the maximum permissible up-front commissions over three stages.
ASIC will undertake a review of the reforms in 2021. If this review does not identify a significant improvement in product churn and the quality of advice, the government will move to mandate level commissions, as was recommended by the Financial System Inquiry.
Full details of the measure are contained in the explanatory memorandum. I commend the bill to the House.
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