On 3 December 2015, the Federal Government released an exposure draft regarding amendments to the life insurance remuneration arrangements under the Corporations Act 2001. The bill seeks to legislate the Government’s response to the Financial System Inquiry (FSI) which handed down its recommendations earlier this year. The bill is designed to limit the circumstances in which the conflicted remuneration exemption on life insurance applies.
The Bill seeks to impose additional hurdles to make it more difficult for life risk insurance products to be exempt from conflicted remuneration that is a monetary benefit. The practical effect of this is that it will limit the monetary benefits for the sale of life risk insurance products.
For most financial products, licensees must not receive conflicted remuneration. Conflicted remuneration is a benefit given to a licensee who provides financial product advice to retail clients that could reasonably be expected to influence the choice of financial product recommended by the licensee or could reasonably be expected to influence the financial product advice given.
However, life risk insurance products are currently exempt from this general prohibition where the benefit is a monetary benefit provided for a life policy outside superannuation; or the life policy is within superannuation but is an individual policy for a choice member.
The proposed amendments seek to impose further restrictions on the life risk insurance product exemption. If passed, the exception to the ban on conflicted remuneration will only apply if:
- the benefit is a level commission;
- or the benefit satisfies the benefit ratio requirements and clawback requirements under the Bill.
A proposed new section 963BA will give ASIC the power to determine a benefit ratio requirement. The ratio is calculated with reference to the amount payable for the product and the benefit payable to the licensee. Under the current proposal, upfront commissions would be capped at 80 per cent of premium from 1 July 2016, at 70 per cent of premium from 1 July 2017 and at 60 per cent of premium from 1 July 2018. Ongoing commissions would be capped at 20 per cent of premium from 1 July 2016.
Section 963BA would also introduce clawback requirements which means that licensees would be required to pay back all or part of the benefit if the product is cancelled or is not renewed or the premium is reduced within 2 years after it is first issued to a retail client. Again, ASIC has the power to determine the amount for the clawback requirements.
Under the current proposal, if the policy lapses or the premium decreases in the first year, 100 per cent of the commission on the first year’s premium is clawed back. If the policy lapses or the premium decreases in the second year, 60 per cent of the commission on the first year’s premium is clawed back.
If passed, the amendments have a commencement date of 1 July 2016. The consultation period for the bill ends on 4 January 2016. The consultation period could be a challenge for some organisations given the Christmas/New Year shutdown period.
These changes are likely to have a significant impact on life insurance broker businesses and the life insurance industry generally.