ASIC has released Consultation Paper 245 on the implementation of the retail life insurance reforms following the release of the exposure draft of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2015 (Bill) on 3 December 2015.
ASIC's consultation paper confirms the Government's proposals for commission caps and clawback arrangements:
Click here to view table.
These limits and requirements will be imposed by ASIC determination made under the changes to the life insurance exemption proposed in the Bill. Importantly, they only apply to hybrid commission arrangements. The Bill expressly permits level commission arrangements with no limit on the rate of commission and no requirement for any clawback arrangements to apply.
The major element of the ASIC consultation paper which is new is the details of the extensive information that ASIC will require life insurers to provide using its powers under s912C of the Corporations Act:
- information on life insurance policies over a 2 to 5 year period, including: number and details of policies are in force, including inception date for each policy, how many policies are to ‘first time insureds’, how many are new or altered policies sold to existing policy holders, the type of policies, the structure of policies (including premiums and the sum insured) and any trends in the structure of policies over time (e.g. an increase or decrease in premiums relative to the sum insured), and how many policies have been exited (and the reasons for the exit)
- remuneration data, including historical data on commissions (where relevant), the type of remuneration model adopted (i.e. upfront commission, hybrid commission, level commission, or no commission) and the level of upfront and ongoing commissions being paid
- lapse rates and clawback amounts, including the reasons for policies being exited and for every policy that lapsed, the amount that was clawed back, and
- data on policies sold with personal advice, with general advice or with no advice.
ASIC is seeking submissions on its consultation paper by 29 January 2016 and plans to issue its determination in April 2016 to come into effect on 1 July 2016, the start date of the reforms proposed by the Bill (which will be introduced into Parliament in early 2016).
The reform package will apply to personal and general advice, which includes direct sales channels. By making the new life insurance rules part of the Future of Financial Advice (FOFA) regime, the Bill will have the effect of prohibiting any benefit which could reasonably be expected to influence advice in relation to life risk insurance unless it meets one of the exceptions:
- it is a level commission arrangement, or
- it is a hybrid commission arrangement which meets the commission cap and clawback requirements above.
This means that other types of remuneration, such as flat fees and profit share, will need to be reviewed to determine whether they could reasonably be expected to influence advice.
Grandfathering will apply, but only to life insurance policies issued before 1 July 2016 where remuneration is paid under an arrangement entered into before that date. This means that grandfathering will apply to increases in sums insured after 1 July 2016 where the policy was issued before that date.
Importantly, the current FOFA grandfathering provisions where, for example, advisers change licensee will not apply to the life insurance reforms at this stage. This is because these provisions are made under regulations relating to the grandfathering provisions for other types of advice and they do not apply to the grandfathering provisions proposed to be introduced by the life insurance reforms. Furthermore, the Bill does not currently have the capacity for grandfathering regulations to be made. It will therefore be important to raise this issue in submissions to the Government on the Bill which are due by 4 January 2016.