The exemption from the FOFA conflicted remuneration provisions for life risk insurance products will be significantly amended from 1 July 2016 under draft legislation released by the Federal Government for consultation. Under the proposed laws, a commission received would be conflicted remuneration unless new “benefit ratio requirements” and “clawback requirements” are satisfied or if the ratio between the benefit and amount payable for the product is the same in the year in which the product is issued as it is for each year the product is renewed.
The legislation does not prescribe the benefit ratio requirements and clawback requirements, instead leaving these for ASIC to determine. This is part of a growing trend for Australian regulators who are increasingly assuming a law-making role in addition to their regulatory rule.
However, noting the Federal Government’s previous statements (on which we have previously reported) it is possible that upfront commissions received for personal and general advice (including direct sales channels) will be capped by ASIC 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.
A two year clawback for commissions received under a life insurance policy, will apply 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.
These changes represent the Federal Government’s response to recommendation 24 of the Financial System Inquiry and also to an industry-led law reform package released in June this year on which we have previously reported.
Public consultation on the draft legislation will close on 4 January 2016.