Upfront commissions affect the quality of life insurance advice, says FSI

by Julia Corderoy10 Dec 2014
High up-front commissions for selling life insurance has caught the attention of David Murray’s Financial Services Inquiry, which says that these commissions can cause irresponsible behaviour.

In an ASIC review, it was found that more than a third of the advice consumers received failed to comply with regulation governing a consumer’s best interest. Of this, ASIC found that around 96% came from advisers paid under an upfront commission model. 

Since life insurance products are exempt from FOFA, allowing them to be paid under a commission structure, the Inquiry is concerned about the culture of non-compliance this may breed. 

“This allows individual life policies to be sold with high upfront commissions, creating an incentive for advisers to make a sale, rather than provide strategic advice. For example, these policies can have 100–130 per cent of the first year’s premium payable as upfront commissions, with an ongoing trail commission of around 10 per cent,” the FSI states.

“The Inquiry believes changes are required not only to the regulatory regime and supervisory approach, but also to the culture and conduct of financial firms’ management, which needs to focus on consumer interests and outcomes.”

Rather than banning commission altogether and introducing an upfront fee, which may deter consumers from purchasing life insurance at all, the Inquiry recommends a change in commission structure.

“For life insurance, the Inquiry recommends a level commission structure implemented through legislation requiring that an upfront commission is not greater than the ongoing commission. This would provide a balanced and cost effective approach to better align the interests of advisers and consumers.

“However, if level commission structures do not address the issues in life insurance, Government should revisit banning commissions.”

The report hasn’t determined the percentage amount of the level commissions that should apply, stating this should be left to the market and industry. 

It also notes that the FOFA ban on conflicted remuneration in financial planning should bring significant change to the industry and benefits for consumers. However, the remaining incentive-based remuneration models, such as brokers, should be monitored for instances of conflicted remuneration.