Clawback arrangements need common sense

Remuneration clawback on life insurance advice should not be triggered where insurance policies end or premiums reduce despite the financial adviser complying with their obligations and for reasons beyond their control, the Association of Financial Advisers (AFA) argued.

In its submission to the revised life insurance remuneration regulations, which the Federal Government released on 19 October, the AFA proposed certain regulations in Corporations Regulations 2001 include the option "an objective person would consider it reasonable in the circumstances for benefits paid to a licensee or representative to not need repayment".

It listed anticipated reasons why policies may cancel or premiums reduce beyond a planner's control, including policy cancellations initiated by clients.

Other examples cited by the AFA but not included in the proposed clawback trigger exemptions included:

• Where a policy holder attains a maternity leave "premium holiday", due to maternity leave or financial strife, which would result in a premium reduction within the first two years. These circumstances could not be predicted by the adviser; and
• Where a policy holder receives an inheritance or a windfall and asked for a sum insured revision within two years after paying a significant portion of their debts, which would result in a premium reduction due to lower benefit coverage.

While the AFA acknowledged it would be difficult to predict every situation, it asked insurers to exercise flexibility and common sense when deciding on exemptions to clawback.

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It also proposed the Bill's Explanatory Memorandum could incorporate flexibility into it with the inclusion of the word "may": "The legislation specifies that clawback may occur in the first two years of a policy where...".

The AFA has also sought clarity around the responsibility on whom the clawback would rest where an arrangement might change, whether it be the Australian financial services licensee (AFSL) or the adviser/fee recipient.

"We understand that the general rule is that the risks and liability are acquired with assets purchased, unless the parties state otherwise," the submission said.

"Accordingly, the AFA recommends that the regulations should clarify that responsibility rests with the servicing adviser (at the time of clawback) unless agreed to otherwise by the parties."

The AFA said clarity was also required around ongoing benefits where "an arrangement" might change, emphasising that if the arrangement was entered into before 1 January, 2018, due to the application being submitted before that date, any subsequent changes as to who would receive ongoing commission would not result in a "new arrangement".

This could include situations where the ongoing benefit is consigned to another adviser or licensee, the ongoing benefit is diverted by the product issuer to a new or another licensee, and the ongoing benefit is passed by the licensee to a person who changes from an employee representative to an authorised representative.