Industry still in the dark on disclosure

Commission disclosure for life insurance products is no stranger to controversy. Gareth Cosslett asks if the latest battle, concerning two pieces of key financial services legislation, will sound its death knell finally.

Commission disclosure for life insurance products is no stranger to controversy. Gareth Cosslett asks if the latest battle, concerning two pieces of key financial services legislation, will sound its death knell finally.

Long-anticipated regulations that will make the disclosure of commis-sion on life insurance products compulsory are looking imminent. Al-though the Federal Government's original vehicle for glasnost in risk products, the Life Insurance Conduct and Disclosure (LICD) Bill, has now sunk after floundering for the past four years, the requirement for full disclosure is an odds-on favourite to be pushed through via CLERP 6 next year.

Last month, financial advisers and life agents won a temporary re-prieve after industry resistance to full disclosure successfully de-railed the LICD bill. The office of the Minister for Financial Serv-ices and Regulation, Joe Hockey, says it lacked the drafting re-sources to respond to the comments and queries from financial indus-try organisations before LICD was due to be introduced to Parliament in June. So the bill missed its slot and has since disappeared, with the Choice of Superannuation Fund (Consumer Protection) Bill rising from its ashes.

Time restrictions mean it now seems unlikely that the super choice bill will be able to fulfil the planned role of LICD and act as a stopgap measure, forcing disclosure of commissions on risk products before the July 1, 2000 introduction of CLERP 6. So the onus falls on CLERP 6 to make disclosure compulsory and all the noises from Joe Hockey's office suggest the Federal Government is determined to cast the requirement in stone next July.

A spokesperson from Joe Hockey's office says: "Because we were spe-cifically trying to avoid any delays, we compromised and made some changes to LICD. We agreed that, for standalone risk products, the adviser only had to disclose to the consumer their right to request information on the commission. However, we made it clear what outcome would be reached in CLERP 6."

The outcome is that full, up-front disclosure on all commissions in-cluding risk products will be required. After the kafuffle over LICD, Joe Hockey's office now seems even more determined to stick to its guns on disclosure in CLERP 6.

"Our view is that the consumer's decision-making process involves a number of factors which they should have full knowledge about," the spokesperson says.

"This includes any potential biases or conflict of interest as to why an adviser might be pushing one company's product as opposed to an-other's product. We have had a wide range of support for this, not just from consumer organisations. We do intend to put in place some legislative-based consumer protection in life insurance."

However, Joe Hockey's office is still "open for consultation" and is working through about 115 submissions on CLERP 6. John Hibberd, na-tional president of the Association of Financial Advisers (AFA), says "hard, persuasive arguments" from FinPrac (the lobbying group backed by the AFA and the National Council of Financial Adviser Associa-tions) was successful in throwing LICD off track - and could still beat CLERP 6.

"The jury's still out on this. There are a number of people in the political process that need to approve it," Hibberd says.

LICD was put into limbo after considerable backbencher opposition to full disclosure and pressure groups will continue their intensive lobbying - and lunching - of backbencher sympathisers.

Hibberd stands by the AFA's original rationale for opposing full dis-closure. "A risk product is a commodity and the price of the term in-surance contract is the only thing that has an impact on the con-sumer," he says.

"The commission is fixed and doesn't affect them. If they do see the commission then it will only lead to confusion. Consumers may pick policies on the perceived commission paid to the agent rather than the best combination of policy values and service."

There are also fears that the self-employed small business advisers will lose out to salaried employees of providers and distributors such as Colonial that would not have to disclose commission when sup-plying products over the counter.

"Unless we have total cost disclosure then the process will be dis-torted. All costs - including the management charges of the suppliers - should be revealed. We could sell that to the politicians," Hibberd says.

Many observers find certain quarters of the industry's resistance to full disclosure puzzling. FinPrac itself says that only one per cent of consumers inquire about commission and proponents of full disclo-sure argue that, if there is nothing to hide, then why hide it?

AMP has made a full disclosure compulsory on its risk products for about three years. "Part of giving good advice is full disclosure so that everyone knows that all the cards are on the table," says Steven Helmich, managing director of AMP Financial Planning.

Helmich says practices such as churning, where clients are encouraged to switch life insurance products so the advisers can enjoy the front-end loaded commission regularly, reached their peak in the late '80s.

"It was a fairly voracious industry back then and people were looking to make a dollar at any cost. However, churning is not really a big issue any more. There's some risk that, by churning, the client may be rendered uninsurable if their health has deteriorated since set-ting up the last policy."

Despite these claims, churning undoubtedly does take place. The old argument that reams of application forms and medical examinations make it too inconvenient - and too risky - to churn clients were as relevant in the late '80s as they are now, and the pro-disclosure lobbyists will be telling the politicians in the run up to CLERP 6 that full disclosure of commissions actually will reduce the risk of churning.

The current fee structures of up to 100 per cent of the annual pre-mium paid up front to the adviser followed by a small trail commis-sion will change almost definitely if disclosure becomes compulsory. A flat annual rate of about 15 per cent will seem far more palatable to the consumer.

AMP's Steve Helmich says he is considering switching from the current pay structure of 70 per cent of the first year's premium up front.

"We might offer an up-front premium and a level-loaded flat rate so the advisers and the clients can decide. The real key to the future is to have commissions replaced entirely by fees. The consumers that are particularly worried about commissions will probably buy their business over the Internet,'' Helmich says.

However, one anonymous life agent claims the suppliers are as much to blame as the advisers for a lower flat rate of about 15 per cent not being phased in earlier.

"Agents have suggested this to the insurance companies but they wouldn't buy. They are worried because their managers are paid com-mission on new business coming in. The front-end loaded commissions mean both sides encourage churning as the agents receive higher com-missions more regularly and the insurance company executives also feed their own bonuses."

Offshore conferences laid on by insurance companies for agents that meet new business targets also are undoubtedly an incentive to churn.

Michael McKenna, chief executive of the Financial Planning Associa-tion (FPA), maintains churning is not an issue.

"You don't churn in risk. Clients stay with the policy unless some-thing drastic happens. There are usually better premiums available for renewals and, usually, the younger you are when agreeing to the policy, the better the terms are." he says.

McKenna says all FPA members are required to disclose commissions on risk products. "It has been a requisite of the FPA since its incep-tion. We were well ahead of the legislation and all our members are required to disclose all commissions - including risk."

However, the AFA's John Hibberd says that in reality, not all FPA members disclose. "There are a large number of pe