FSC defends value of LIF amid cartel claims
The Financial Services Council (FSC) has defended its role in the development of the Life Insurance Framework (LIF) in the face of strong criticism of some life/risk advisers who have accused it of participating in cartel-type activity.
FSC chief executive, Sally Loane, has directly responded to the cartel claims reported in Money Management, pointing out that the Trowbridge Report process had been jointly commissioned by the FSC and the Association of Financial Advisers (AFA) and had represented a necessary response to highly adverse findings made by the Australian Securities and Investments Commission (ASIC).
Further, she has pointed to the development of a life insurance Code of Practice for insurers and consumers which she said would have binding obligations that life insurers owe to consumers.
"It is important to remember the history of this entire process of reform. The ASIC Review of Retail Life Insurance and Advice found that remuneration arrangements allowing commissions of 120 per cent of the first year's premium created an incentive to offer advice that may not be in the best interests of the client, notwithstanding the legal requirements of the best interests duty," Loane said.
"ASIC found that 45 per cent of cases reviewed failed to meet the required advice standards where high upfront commission was used. It also found a correlation between high upfront commissions and high lapse rates."
She noted that, at the time, ASIC Deputy Chairman, Peter Kell, had described this as an "unacceptable level of failure" and that ASIC had urged the development of industry wide solutions to address the misaligned incentives which it found was influencing the quality of life insurance advice.
"Following the release of the ASIC report, the FSC, along with the AFA, commissioned a report into the sector by independent actuary and former APRA member John Trowbridge. His recommendations, delivered in March 2015, included the removal of high up front commissions, and were designed to better align interests across the life insurance sector, from insurer, to licensee to adviser and to consumers."
Loane said the reforms resulting from the Trowbridge process and contained in the life insurance reform bill, the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 contained significant amendments to adviser remuneration, and were designed to improve the quality of advice consumers receive by regulating conflicted remuneration.
"These reforms are designed to address key issues identified in ASIC's 2014 Review," she said.
"While high up front commissions have been significantly reduced, the arrangements allow the continuation of upfront commissions at levels that provide support for the independent adviser market and provide an appropriate transition over two years."
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