Risk Committee opts for non-disclosure, Labor disagrees

The Joint Parliamentary Committee inquiry into commissions on risk products has veered away from recommending mandatory disclosure rules for risk advisers, warning that to do so may force many small businesses to close down or down-size.

However the committee’s report, released yesterday, expresses concern over the concentration of manufacturing and distribution in the insurance industry and recommends Government undertake a review of the extent and likely effect of consolidation and restructuring in the sector.

It suggests that the terms of reference for such a review include whether increasing numbers of ‘tied advisers’ or growth in the use of direct selling are adversely affecting the quality and independence of advice available to consumers.

While voicing a raft of recommendations aimed at tightening the disclosure provisions, including that Treasury and theAustralian Securities and Investments Commissioninvestigate claims of disclosure abuses on packaged products, the committee adopts a benevolent view on the role of risk advisers, “bearing in mind the very clear trend in the insurance industry towards consolidation and concentration of manufacturing and distribution”.

“The Committee is concerned that competition may be stymied in this environment and fail to deliver benefits to consumers that would be expected from a properly functioning market,” the report says.

The committee does not advocate commission disclosure for risk advisers as commissions don’t affect the end benefit received and “the requirements have the potential to mislead consumers about the independence and reliability of advice on risk insurance products.”

It says the requirements generally don’t promote comparability of advisers’ remuneration and, without this, it is difficult to see how consumers will be able to detect the potential for bias - the underlying rationale for such a disclosure requirement.

“There is a real danger that disclosure would adversely affect the small risk insurance businesses and consequently consumers would suffer through loss of expertise in the risk insurance business, loss of independent advisers, less access to risk insurance advice for those on lower incomes and an undermining of the level of service delivery, especially in the area of claims handling,” the report says.

However in a dissenting report, four Australian Labor Party parliamentarians sitting on the Joint Committee say that despite the majority report accepting in principle that disclosure is in the interests of consumers, it then goes on to build a case against disclosure.

“This argument is premised on the unsubstantiated assertion that consumers will be deterred from buying insurance from commissioned advisers once disclosure is required. From this basis it is argued that commissioned advisers will go out of business and that the service and expertise they provide will be lost to consumers,” the dissenting report says.

“Labor members believe that these views are unnecessarily pessimistic…and note the evidence from members of the financial planning industry that the predictions of doom in that industry following the introduction of mandatory commission disclosure did not materialise.”