The Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 (Bill) has passed both Houses and will take effect from 1 January 2018. After originally lapsing in April 2016, the Bill was reintroduced late last year with minor changes.
The Bill will have a significant impact on life insurance brokers and represents the government’s response to a number of investigations into the life insurance industry.
Change to exemption against conflicted remuneration ban
The Bill amends the Corporations Act to remove the exemption against the ban on conflicted remuneration for benefits paid in relation to certain life insurance products. Conflicted remuneration is a benefit which could reasonably be expected to influence the choice of financial product recommended, or the financial product advice given, to retail clients.
From 1 January 2018, the exemption to the ban on conflicted remuneration will only apply to life risk insurance products if:
- the benefit is a level commission; or
- the benefit satisfies the benefit ratio requirements and clawback requirements under the Bill.
ASIC has the power to determine the benefit ratio requirements. The benefit ratio is calculated with reference to the benefit and the policy cost for the product (which includes premiums and other fees payable).
The clawback requirements require financial services licensees to pay back all or part of the benefit if:
- the product is cancelled or not renewed; or
- the policy cost is reduced,
within two years after it is first issued to a retail client, and that benefit is equal to or greater than the amount set by ASIC.
Possibility for non-advice circumstances to amount to conflicted remuneration
The Bill has also removed the exemption for life risk insurance products whereby a benefit is not conflicted remuneration if no financial advice in relation to the product has been given to the person in the last 12 months. This was purposely done to allow the Regulations to prescribe circumstances in which benefits in relation to life insurance are conflicted remuneration even where the circumstances do not involve the provision of financial product advice. This was not included in the earlier version of the Bill.
Whilst the Regulations have not yet been passed, under the draft version a benefit given to a financial services licensee, or representative of a financial services licensee, would be conflicted remuneration if the benefit is given in relation to:
- a dealing in a life risk insurance product with a person as a retail client;
- financial product advice provided to a retail client in relation to a life risk insurance product; or
- information given to a person in relation to a life risk insurance product.
This is a significant development as it extends the application of conflicted remuneration to non-advice scenarios and will impact multiple distribution channels for life risk insurance products.
If passed, the Regulations will also commence on 1 January 2018.