ASIC will be given new powers to set caps on commissions and enable “clawbacks” of commissions paid under planned amendments to the Corporations Act following new reforms announced by the Federal Government. These reforms represent the Government’s response to recommendation 24 of the Financial System Inquiry1 and also to an industry-led law reform package released in June this year on which we have previously reported.
With threats of further reform and ASIC inquiries, the Federal Government has announced significant reforms to the retail life insurance industry. Commencing 1 July 2016 upfront commissions received for personal and general advice (including direct sales channels) will be capped as follows:
- 80 per cent from 1 July 2016;
- 70 per cent from 1 July 2017; and
- 60 per cent from 1 July 2018, together with a maximum 20 per cent ongoing commission.
In addition, the Government will introduce a two year clawback for commissions received under a life insurance policy, applying as follows:
- in the first year of the policy, to 100 per cent of the commission on the first year's premium; and
- in the second year of the policy, to 60 per cent of the commission on the first year's premium.
Draft legislation to implement the commission-caps and clawback will be released for consultation by the “end of 2015” before being introduced into Parliament in the new year. However, these are not the only reforms likely to affect the industry in the near future. After this first wave of reform, ASIC will:
- investigate compliance with remuneration disclosure as part of a broader review of Statements of Advice. This will occur in the second half of 2016; and
- review of the effectiveness of the commission-cap and clawback reforms in 2018. If that review does not identify significant improvement, the Government intends to follow the recommendations of the Murray Inquiry by mandating level commissions.
Finally, the Government intends that industry will also bear some of the reform burden. The FSC has been tasked with developing a Life Insurance Code of Practice, which will set out best practice standards for insurers, including in relation to underwriting and claims management. The code will be similar to existing codes for Banking and General Insurance. In addition, while no precise details have been provided, the Government has flagged a widening Approved Product Lists through the development of a new industry standard.
If you would like to make a submission to the legislative consultation when announced, or would like to prepare for ASIC’s review of Statements of Advice, please contact a member of our team.