Churning up a heated debate

There are mixed views and few facts concerning precisely how much “churn” occurs within the life/risk sector, and how many advisers might be deemed serial offenders where the “churning” of policies is concerned.

What seems certain, however, is that the most reliable data on policy churning can be obtained from the major insurance companies – something which suggests that the insurers know only too well who the guilty parties really are.

And this probably explains at least some of the anger directed towards the Financial Services Council (FSC) when, a fortnight ago, its chief executive John Brogden announced the broad-brush details of a new life insurance framework aimed at reducing churning by imposing claw-back provisions.

The new framework, released by Brogden during the closing day of the FSC’s annual conference on the Gold Coast, reflected some of the adjustments the FSC insurer members clearly thought were necessary following the less than stellar reception of its earlier anti-churn pronouncement.

At the core of the FSC framework – and at the core of the concerns expressed by advisers – was the ‘three-year adviser responsibility period’.

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During that period a ‘tiered claw-back provision’ would be implemented as follows:

• 100 per cent of remuneration paid by an insurer to an adviser if the policy lapses within the first year;
• 75 per cent of remuneration paid by an insurer if the policy lapses within the second year; and
• 50 per cent of remuneration paid by an insurer if the policy lapses within the third year.

Brogden said it was proposed that the framework would begin from 1 July next year, but that it would not apply to advisers providing life insurance advice on a fee-for-service basis where agreed by the client.

What needs to be understood about the FSC’s approach to the claw-back arrangements is that it is a direct reflection of the organisation’s dealings with the Minister for Financial Services Bill Shorten in the context of the Future of Financial Advice (FOFA) legislation.

Indeed, Brogden even went so far as to cite the following quote from Shorten during the FOFA process and discussion around churning:

“A claw-back provision enables life insurance companies to recover some or all of the commission paid if a policy turns over early. The Government will work with industry and consumer groups to introduce uniform ‘claw-back’ provisions to remove the incentive for some advisers to shop around for the most generous claw-back arrangements”.

When Money Management published Brogden’s announcement it was immediately inundated by adviser complaints that the FSC was clearly working to bolster the interests of its members at the expense of honest advisers who were at risk of being penalised because of the actions of a small group of churners.

As one comment on the Money Management web site said: “It is nothing more than a greedy grab for cash by the insurers. It will do nothing to address the issue of churning. A replacement policy will still generate 100 per cent of the benefit after 36 months. Yet an honest adviser that has a client change their mind, or cancel a policy due to unforeseen circumstances, will see the adviser stung with a bill from the insurance company. Maybe I should think about churning my clients after three years to help cover the cost of claw-backs?”.

For their part, both the Association of Financial Advisers (AFA) and the Financial Planning Association (FPA) have expressed reservations about the FSC’s approach and sought clarification on precisely how the three-year adviser responsibility period will apply, particularly with respect to hybrid and level commission structures.

AFA chief executive Richard Klipin has told Money Management that emotions are high amongst some members of his organisation over the FSC proposals and that the phone had been running hot on the issue.

While all of the major insurers are members of the FSC and most have kept their own counsel with respect to the claw-back proposals, some have privately made clear to Money Management that they well understand the anger being felt by the vast majority of honest advisers.

Reflecting the level of anger in the industry and the need for an open and balanced debate on the issue, Money Management has joined with the AFA to convene a forum for discussion on the FSC’s new approach to be held in Sydney on 12 September 2012, at which senior industry figures, including advice principals and advisers, will have their say.