The Government has accepted the retail life insurance reforms proposed by the Association of Financial Advisers, the Financial Planning Association and the Financial Services Council and announced the implementation timetable.

The changes will commence on 1 July 2016 and will apply to personal and general advice, including direct sales channels.

The key element of the reform package is the reduction of upfront commissions for advisers and licensees in order to discourage replacement of policies where there is no consumer benefit. No changes will be made that affect industry’s ability to operate on a level commission or fee-for-service basis.

The reduction of upfront commissions will take place over 3 years as follows:

• a maximum total upfront commission of 80 per cent from 1 July 2016, 70 per cent from 1 July 2017 and then 60 per cent from 1 July 2018;
• The premium on which the commission caps are calculated can include the base premium, frequency loading and the policy fee but cannot include stamp duty. The commission cap is exclusive of GST.

A two year up front commission retention (‘clawback’) period will commence from 1 July 2016 as follows:

• when a policy lapses or the premium decreases in the first year of the policy, to 100 per cent of the commission on the first year’s premium; and
• when a policy lapses or the premium decreases in the second year of the policy, to 60 per cent of the commission on the first year’s premium.
• The only exclusions to the definition of lapse will be when a claim is made or suicide/self-harm.

There will be a maximum 20 per cent ongoing annual commission commencing 1 July 2016.

The Government will amend the Corporations Act to give ASIC the power to create a legislative instrument to set caps on commissions and implement clawback arrangements.

Timetable

The Government is developing draft legislation for consultation by the end of 2015, and legislation will be introduced in early 2016. ASIC will commence consultation on the draft legislative instrument on a similar timeframe.

ASIC will undertake a review of the reforms in 2018. If the 2018 review does not identify significant improvement, the Government will move to mandate level commissions, as was recommended by the Murray Inquiry.

Other changes

The Government will ban other volume based payments and grandfather existing arrangements in a manner broadly consistent with FOFA by making amendments to the Corporations Act.

ASIC will review Statements of Advice in the second half of 2016, with a view to strengthening remuneration disclosure as part of a broader review by ASIC of life insurance Statements of Advice, including prominent upfront statements about commissions.

The FSC will have responsibility for creating the Life Insurance Code of Practice. Similar to existing codes for Banking and General Insurance, the Code will set out best practice standards for insurers, including in relation to underwriting and claims management.

Industry will also have responsibility for widening Approved Product Lists through the development of a new industry standard.