A comprehensive review of the life insurance sector, commissioned by the Financial Services Council, has called for an overhaul of “conflicted” remuneration. This comes as the Reserve Bank has also sounded an alarm on mortgage broker commissions.
The Trowbridge Report, produced in response to ASIC’s review of retail life insurance advice, has recommended that the industry introduces a $1,200 cap on upfront commissions for life insurance advice.
“Misaligned incentives that have been found to influence the quality of life insurance advice require urgent attention. It is up to the industry to take the initiative to respond positively to these recommendations,” John Trowbridge, author of the independent report said.
“Consumers are at the heart of these recommendations which aim to restore trust and confidence in the life insurance sector through eliminating misaligned financial incentives offered to advisers and licensees, and encouraging competition through a wider choice of products so Australians are adequately insured for their lifecycle needs.”
However, some are calling for commissions to be banned completely. Industry Super Australia says the state of the retail life insurance sector is abysmal and capping commissions won’t solve the fundamental conflict of interest it causes.
“Conflicted remuneration structures are the primary cause of poor advice in Australia, featuring in every major advice scandal of the past decade. If allowed to remain, they will continue to undermine the quality of advice and insurance outcomes for clients,” Robbie Campo, deputy CEO of Industry Super Australia said.
“A transition towards phasing out commission-based remuneration is the only long term sustainable solution compatible with a professional financial advice industry. Other options, such as allowing capped commissions only up to the value of advice provided, do not seem to have been seriously considered.”
An ASIC investigation into life insurance advice conducted in October found that more than a third (37%) of the advice consumers received failed to comply with regulation governing a consumer’s best interest.
As the mortgage broking industry increasingly looks to diversify by offering insurance to complement the mortgage transaction, brokers should also be cautious about the crackdown on life insurance advice.
This has also come at the same time as the Reserve Bank of Australia warned banks over increasing broker commissions, saying it could create “significant amounts” of risky lending.