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Life insurance advice improved but consumers still at risk

CHOICE says commissions will continue to compromise the quality of advice

11 February 2016

Consumer advocacy group CHOICE has welcomed legislation introduced by the Federal Government today that will reduce but not remove commissions for life insurance advice but warns that consumers are still at risk of bad advice and product churn.

"Laws banning financial advice commissions currently have a poorly justified loophole for life insurance products. We know this leads to consumers being placed in poor products and advisers encouraging clients to regularly switch to new products so they can rake in more money," says CHOICE Campaigns Manager Erin Turner.

New laws introduced by the Minister for Small Business and Assistant Treasurer Kelly O'Dwyer will lead to a cap on commissions that will be phased in over three years. Upfront and ongoing commissions will be capped at 60 and 20 per cent respectively, with a two-year clawback provision to discourage product churn.

"The Federal Government has faced an aggressive lobbying campaign by financial advisers seeking to protect the conflicted remuneration models upon which their industry is built. The result is an agreement that removes the worst practices in the industry but more is needed."

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[2]

"The research is clear – commissions on financial advice hurt consumers. This legislation is a step in the right direction but anyone getting life insurance advice needs to be wary," says Ms Turner. 

"Consumers still cannot trust that the advice they receive from an adviser who receives commissions is in their best interests. This makes it more important than ever that ASIC receives enough funding in the next Federal Budget to keep the industry in line."
 
[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/
[2] Ibid, ASIC (2014)

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