What happens when banks churn?
A financial adviser has raised concerns about some of the marketing strategies used by banks to sell life insurance, which could have a negative financial impact on risk advisers if the Financial Services Council's (FSC's) commission clawback policy is implemented in its current form.
The adviser, who wished to remain anonymous, told Money Management one of his clients had recently visited a "big four" bank regarding a business loan and was introduced to an insurance representative.
The representative, he said, urged the client to cancel all her existing policies and rewrite with the bank.
The adviser said his client received a letter outlining the reasoning behind the bank's recommendations, which he said did not meet all the criteria for a statement of advice, either.
"I'm not too concerned about the fact that the banks do it because that's the reality of the business world in terms of the marketing," the adviser said.
However, he said such practices could soon come with detrimental effects for advisers financially, if the FSC's commission clawback policy is implemented in its current form.
"People can be churned automatically the minute they go and see their bank," he said.
"The advisers who had written the policies in the previous three years will lose financially through no fault of theirs."
The FSC proposed a three-year commission clawback, whereby advisers will have to return 100 per cent of their commission if the policy lapses in the first year, 75 per cent if it lapses in the second year and 50 per cent in the third year.
The Council's consultation paper states that the framework "does not capture policies which are acquired without advice through superannuation or direct distribution channels".
However, it is unclear whether the commission clawback policy would apply if clients cancel life policies of their own accord and purchase new ones through direct distribution channels. The FSC could not be reached for comment before Money Management's print deadline.
The Association of Financial Advisers (AFA) acting chief executive officer, Brad Fox, said the AFA was still actively in discussions with the FSC about the future arrangements for insurance commissions - and the definition and causes of lapse are a key part of those discussions.
"These are the nuances in the debate and the view of the AFA is that, to create a sustainable insurance industry, you'd need to look after the considerations of both the product providers and the advisers who rely on that income to run their businesses and service their clients," Fox said.
Money Management recently reported that the FSC was understood to be close to reaching a compromise on its so-called anti-churn framework which could see commission clawback periods shortened.
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