On 3 December 2015, the Government released draft legislative amendments containing its proposed amendments to the Corporations Act 2001 (see our blog post here). The bill is designed to introduce a number of retail life insurance industry reforms. Specifically, it is designed to limit the circumstances in which the conflicted remuneration exemption on life insurance applies to retail life insurance products. The Government proposes to amend the Corporations Act to provide ASIC with a power to make a legislative instrument setting out:
- the maximum levels of upfront and ongoing commission payments to be paid to advisers ‘benefit ratio requirements‘; and
- the amount of upfront commissions to be repaid to life insurers under ‘clawback’ arrangements ‘clawback arrangements‘.
ASIC has now released a consultation paper setting out ASIC’s proposals regarding benefit ratio requirements, clawback requirements and ongoing reporting.
Benefit ratio requirements
The benefit ratio requirements in the draft bill seek to cap the maximum level of commission to be paid by life insurers to advisers. One of the rationales behind this cap is the positive correlation between high upfront commissions and poor advice. ASIC proposes that, from 1 July 2018, if a life insurer adopts an upfront or hybrid commission model, then:
- the level of commissions will be set at a maximum of 60% of the premium in the first year of the policy; and
- an ongoing commission for policy renewals will be set at a maximum of 20% of the total premium paid for the renewal.
ASIC further proposes a transition period of two years, where the maximum total upfront commission level would be stepped in the following fashion:
- From 1 July 2016: 80% of the premium in the first year of the policy;
- From 1 July 2017: 70% of the premium in the first year of the policy;
- From 1 July 2018: 60% of the premium in the first year of the policy.
The clawback arrangements in the draft bill seek to determine the amount of benefits to be repaid by advisers if the life insurance policy is cancelled or the premium is reduced. ASIC proposes that, if a life insurer pays commission other than under a level commission arrangement, and ‘clawback’ is triggered (by cancellation or non-renewal):
- In the first year of the policy – 100% of the commission paid in the first year will be repaid to the life insurer; and
- In the second year of the policy – 60% of the commission paid in the first year will be repaid to the life insurer.
If the premium is reduced, ASIC proposes:
- In the first year of the policy – advisers must repay the proportion of the premium reduction applied to 100% of the commission received for the first year; and
- In the second year of the policy – advisers must repay the proportion of the premium reduction applied to 60% of the commission received for the first year.
The proposal is intended to remove the incentive for advisers to inappropriately rewrite new business within a two-year period. This proposal should lead to better outcomes for consumers.
The draft bill seeks to impose a requirement that life insurers provide ongoing policy replacement data to ASIC and that ASIC will conduct a review in 2018. ASIC proposes to use its information-gathering powers under s912C of the Corporations Act to require the following information from life insurers on life insurance sold through personal advice, general advice and direct sales:
- Information on life insurance policies (such as type and structure of policies, how many policies are to ‘first time insureds’, reasons for which policies have been exited)
- Remuneration data;
- Lapse rates and clawback amounts;
- Data on policies sold.
The proposal is intended to enable ASIC to monitor changes in industry practices in response to the life insurance reforms, and to establish whether problems in the sector continue to exist.
In developing its proposals, ASIC gave careful consideration to the regulatory and financial impact of the proposal. ASIC also considered the consultation and feedback it received from industry.
ASIC believes the proposals will strike an appropriate balance between:
- encouraging advisers to provide better quality advice (personal and general) to their clients on life insurance; and
- ensuring that life insurers, AFS licensees and independent advisers do not incur unreasonable costs in providing advice that better aligns the interests of advisers and clients in accordance with the requirements in the ASIC instrument.
The industry has until 29 January 2016 to submit feedback and comments regarding the consultation paper. ASIC is seeking feedback from life insurers, AFS licensees and their representatives, and consumers alike. We note the timeframe for providing feedback on the bill itself is 4 January 2016 so if industry participants should note the different closing dates for submissions on these proposals.