Second Reading Speech
28 November 2016
Labor has worked with the financial advice sector to deliver better advice and fairer outcomes for consumers and we are supportive of any measures to improve the quality of financial advice and minimise harm caused by financial advice remuneration structures. However, there is more to do in protecting consumers from misconduct in the life insurance industry. Labor's Future of Financial Advice reforms banned many forms of conflicted remuneration for financial advisers, including for life insurance policies held inside group life policies and superannuation. However, other life insurance policies remain exempt from the Future of Financial Advice ban on conflicted remuneration.
Life insurance is a critical product that consumers use to manage risk for themselves and their families. Good financial advice can help consumers identify their life insurance needs and find appropriate and affordable products that meet those needs. Good advisers ask the right questions about a person's situation and ensure clients can confidently purchase a product that is good value for money. Should the worst happen, the quality of that advice determines when and how a customer receives the financial support they paid for.
But it is an unfortunate fact that far too many Australians have suffered the consequences of inadequate and unreliable financial advice. Media reports at the start of this year indicated that life insurance related disputes had a spike in 2014-15, according to the Financial Ombudsman Service. Across the board, disputes rose by six per cent, while disagreements over lump-sum payouts for claims of total and permanent disability rose by 20 per cent. The House will remember that less than two years after Commonwealth Bank head made an unreserved apology for the bank's financial planning division using forgery, fraud, management cover-ups and inappropriate advice—practices which led to thousands of customers losing their life savings—came the CommInsure scandal. According to reports, during the last six months of 2015 the bank's life insurance branch made a profit of approximately $200 million, while medical reports were manipulated, files went missing, doctors were cherrypicked or leaned on by claims managers to change their opinions, old policy definitions of heart attacks and rheumatoid arthritis were deliberately kept and prioritised to deny claims, and unethical policies were adopted to delay or deny total and permanent disability payments to terminally ill patients and claimants. When these allegations were raised by a whistleblower, the whistleblower was sacked.
It was reported in October this year that Westpac's life insurance arm rejected 37 per cent of total and permanent disability claims. This is an extremely grave concern for an industry that Australians rely on and for which Australians should expect the highest standard of ethics. That is why Labor will continue to argue for a banking royal commission to examine the culture of the industry and ensure Australians can tell their stories.
A series of reports have shown the need for reform to the method of remuneration for life insurance advisers. ASIC Report 413: Review of retail life insurance advice identified a strong connection between up-front commissions, policy lapse rates and poor consumer outcomes. It found, among other things: 45 per cent of advice provided under an up-front commission model failed to comply with the law, as opposed to only seven per cent of non-upfront advice; and 82 per cent of industry uses an upfront commission model and that up-front commissions for advisers are generally between 100 to 130 per cent of the product premium. The industry-commissioned Trowbridge review recommended several reforms to adviser remuneration, including a significant reduction in up-front commissions. Finally, the Financial System Inquiry recommended the abolition of up-front commissions and a move to level commissions, which means that the commission remains the same year after year.
According to ASIC, the up-front commission model is the main remuneration structure for life insurance. ASIC also found that up-front commissions have a 'statistically significant' bearing on the likelihood of an adviser who is working on commission giving advice that does not comply with the law. According to ASIC:
High upfront commissions give advisers an incentive to write new business. The more premiums they write, the more they earn. There is no incentive to provide advice that does not result in a product sale or to provide advice to a client that they retain an existing policy unless the advice is to purchase additional covers or increase the sum insured.
Because life insurance commissions are tied to selling, not giving advice, an incentive is created to sell insurance rather than provide strategic advice. This can lead to clients receiving poor value for money.
It was because of these concerns that Labor supported the life insurance framework bill when it was first introduced to parliament earlier this year, before the election, and that remains our position. But, as we noted then, we have some reservations about the reforms. Industry has been engaged in a long process of consultation and, while there is broad industry agreement on the need to reform the structure of commissions, some groups have voiced concerns or feel their voices have not been heard in the process. The Association of Financial Advisers has stated that 'the vast majority' of its members are supportive of the reforms, but a small group of financial advisers, known as the Life Insurance Consumer Group, has been vocal in its opposition to the bill. We also acknowledge concerns of consumer groups that the bill could go further in protecting consumers. CHOICE Chief Executive Officer Alan Kirkland has said:
Commission-driven churn is one of the major problems in this industry and we think that provisions to claw back commissions should extend for at least three years as originally proposed.
While this bill goes some way to reducing the incentives that can encourage financial advisers to recommend inappropriate life insurance products to consumers, it does not address misconduct on the part of the insurers themselves. For example, it would not address the poor claims-handling practices publicised in the CommInsure scandal and recently detailed in ASIC's Report 498: Life insurance claims: an industry review.
The first version of the Financial Services Council's Life Insurance Code of Practice, released in October this year, aims to improve consumer outcomes in the life insurance sector. But there is too much that it does not cover and much more work to do in this area. I note that the minister for revenue and financial services, Senator Gallagher, has stated that Treasury is looking into further amendments to the Corporations Act in response to the ASIC report.
Mr McCormack: Shadow minister.
Dr LEIGH: The shadow minister. Thank you. I appreciate the interjection.
First of all, this bill does not guarantee that new standards will be enforced. It also does not address concerns with the way the life insurance industry handles claims. It does address issues of conflicted remuneration for financial advisers selling life insurance products, but it ignores extant concerns about conflicted remuneration for claims handlers, who have a role no less important than that of financial advisers, since they are required to make fair and appropriate decisions about the merits of a life insurance claim. So, I note with some disquiet ASIC's recent report demonstrating that at least two life insurers were still paying remuneration with incentives based on how many claims were denied.
Finally, the bill as a whole does not seek to remedy the clear cultural and operational concerns that have become obvious and destructive within the banking and financial services sector. Nonetheless, Labor will support the modest reforms in this bill in the hope that they can improve consumer confidence in the quality of financial advice on life insurance. But we do note that this bill stops short of the recommendations of the Financial System Inquiry and the Trowbridge review to remove up-front commissions. The package still allows for up-front commissions but caps them.
Unfortunately, because the start date has been pushed back from mid-2016 to the beginning of 2018, the 60 per cent cap will not be reached until 2020. This is a long lead period for a modest reform that was agreed to by industry in 2015. Had the government been well organised to progress it, the bill could have been law well before 1 July 2016.
In addition to the limits on the quantum of up-front commissions, the package introduces a two-year 'clawback' of up-front commissions. This means that up-front commissions will have to be paid back to the life insurer by the financial adviser in the event that the policy lapses. It will not be until 2020 that these reforms are fully implemented. We think that the ASIC review, now scheduled for 2021, will be important in making sure that these reforms improve consumer outcomes.
We welcome the implicit endorsement of the Future of Financial Advice framework from those opposite that this bill represents. It represents steps to better align the standard protocols of financial advisers with the interests of consumers, and it addresses concerns about advisers 'churning' clients through products. Labor will help the government pass this bill and we will watch carefully as it is implemented. We will also scrutinise the bill as it begins operation and look forward to ASIC's review at the beginning of the next decade.
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