'A plethora of hidden payments' in the $233 billion life insurance industry means consumers continue to be sold policies that don't fit their needs, an 18-month parliamentary inquiry has found.
Banks and insurance companies were banned from offering commission payments under legal reforms introduced in 2013, but an exception was made when it came to selling life insurance.
Life insurance was already a hard sell to Australians, and there was fear in the industry that the low rate of coverage across the country would only worsen if commissions were banned.
Instead, legislation was passed to shrink the hefty commissions paid to advisers, who were encouraged to sell policies even when they went against the best interest of their clients.
Advisers were earning commissions that actually cost more than the annual premium of life insurance. The 120% commission dropped to 80% once reforms were introduced in 2015.
But insurers, advisers, banks and super funds have found a myriad of ways to supplement commissions with hidden payments, the parliamentary inquiry found.
"The rules banning conflicted remuneration have been introduced specifically in order to mitigate some of the risks around conflicts of interest in the life insurance industry," the report says.
"However, evidence to the committee, particularly from ASIC, indicates that a plethora of hidden payments including commissions, fees, performance-related payments, soft dollar benefits, and nonfinancial benefits still exist within the various structures of the life insurance industry."
The hidden incentives – paid by banks, super funds and life insurers – have 'contributed significantly' to a range of poor practices and misconduct, such as the issuing of misleading advice and the sale of policies with poor outcomes.
The report, scathing in its assessment of the industry, is calling on government bodies including ASIC and APRA to conduct "detailed examinations" of the various payments, benefits and fees being back-channeled throughout the industry.