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Life insurance reforms a good first step

Further reforms needed before consumers can trust advice is in their interests

6 November 2015

CHOICE has welcomed a Federal Government crackdown on life insurance commissions but says it is disappointed that the reforms have been watered down since they were initially announced in June.

"Laws banning financial advice commissions allow an unjustifiable loophole for life insurance products.We know this leads to consumers being placed in poor products and advisers encouraging clients to switch to new products so they can receive commissions," says CHOICE Chief Executive Alan Kirkland.

"We are disappointed that today's announcement will allow advisers to hang onto their upfront commissions if they seek to move a client to a new product after two years. Commission-driven churn is one of the major problems in this industry and we think that provisions to claw back commissions should extend for at least three years as originally proposed.

"This change is the result of an aggressive lobbying campaign by financial advisers seeking to protect the conflicted remuneration models upon which their industry is built."

A recent investigation into life insurance advice by Australia's financial services regulator ASIC found that 37 per cent of advice failed to comply with legal requirements to prioritise the needs of clients.[1] When an adviser was paid under an up-front commission model, 45 per cent of advice did not comply with the law.

"The research is clear – commissions on financial advice hurt consumers," Mr Kirkland says.

"Consumers cannot trust that the advice they receive from an adviser who receives commissions is in their best interests.

"We welcome the Government's commitment to a tougher crackdown if the review of these reforms in 2018 finds that industry has not done enough to clean up its act. Given how strongly the industry has resisted reforms to date, we think that further measures are inevitable.

"In the meantime, it will be critical that ASIC has adequate resources to undertake effective surveillance and enforcement in the life insurance industry."

[1] ASIC (2014), REP 412 Review of retail life insurance advice: http://asic.gov.au/regulatory-resources/find-a-document/reports/rep-413-review-of-retail-life-insurance-advice/

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