Defining real churn is biggest LIF change
A united front on the part of the Financial Planning Association and the Association of Financial Advisers has paid dividends with the new Assistant Treasurer, Kelly O'Dwyer winding back the Life Insurance Framework clawback to two years.
But perhaps the most important element to come out of the changes announced the Assistant Treasurer late on Friday is that formal processes will be put in place identify what is and what is not churn.
O'Dwyer said that the Government would require the industry to develop "appropriate lapse reporting data" to be used to determine the effectiveness of the changes via a review to be undertaken by the Australian Securities and Investments Commission (ASIC).
The minister said that ASIC would be required to work with the industry to ensure strong integrity around the data.
The development of a formalised approach in determining the nature of lapses is seen as being at the core of the issue, with advisers having consistently argued that the major life insurers have always held the lapse data sufficient to identify churn.
Outlining the new approach, O'Dwyer said the final industry package would commence on 1 July 2016 and would apply to personal and general advice, including direct sales channels.
She said key elements of the reform package included:
- phasing down upfront commissions to a maximum of 80 per cent from 1 July 2016; 70 per cent from 1 July 2017 and then 60 per cent from 1 July 2018, together with a maximum 20 per cent ongoing commission; and
- introducing a two year retention (‘clawback') period as follows:
o in the first year of the policy, to 100 per cent of the commission on the first year's premium; and
o in the second year of the policy, to 60 per cent of the commission on the first year's premium.
The final industry package includes this three year phased transition to ensure that advisers have time to adjust their business models to the reforms.
The changes were broadly welcomed by both the AFA and the FPA, with AFA president, Deborah Kent saying they brought greater fairness to the Life Insurance Framework while FPA chief executive, Mark Rantall said he believed the combined efforts of the two organisations had been crucial to the outcome.
ClearView Wealth Limited chief executive, Simon Swanson said while his company broadly welcomed the changes, more needed to be done.
"We look forward to the industry stepping up to the plate to ensure that one of the industry's most pervasive conflicts of interest is properly dealt with by requiring vertically integrated companies to list all APRA-regulated life insurers on their Approved Product Lists," he said.
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