Brokers negotiating a tricky new path

Scrutiny of broker remuneration and heat over commission payments and transparency was always going to rise this year as the Government’s Quality of Advice review commenced and various parties faced off from familiar corners.

Treasury has received 133 submissions on an issues paper released earlier this year and reviewer Michelle Levy is due to deliver a report to the Federal Government by December 16.

As expected, the terms of reference encompass exemptions to the ban on conflicted remuneration, including in life and general insurance, along with issues around personal and general advice.

Brokers, swept up in yet another review where they are not the primary focus, are at pains to point out that they are not a major problem for regulators, and that general insurance products have very different characteristics to those sold in the life and financial advice areas.

In the 2021 financial year the Australian Financial Complaints Authority (AFCA) received a total of 412 complaints relating to brokers, compared with 16,273 for general insurers, and a portion of those intermediary complaints were in fact related to the underwriters, NIBA notes.

Nevertheless, the payment of commissions, which are generally being conflated with conflicted remuneration, remains a thorny issue.

The Australian Competition and Consumer Commission’s three-year inquiry into insurance in northern Australia recommended banning conflicted remuneration paid to brokers, while an inquiry by the Australian Small Business and Family Enterprise Ombudsman took a similar view.

Consumer groups have argued to various reviews and inquiries that exemptions from the ban on conflicted remuneration should be removed.

The Insurance Council of Australia’s (ICA) submission to the Quality of Advice review says consumer protections have increased after recent reforms, including rules for add-on sales and design and distribution obligations, and affordability and availability issues should also be taken into account.

The submission notes the exemption from the ban on conflicted remuneration was allowed for good reason, given general insurance characteristics, and it “would be keen to understand in more detail any specific consumer harms that have arisen because of conflicted sales”.

An independent report for ICA prepared by industry expert John Trowbridge on commercial cover affordability and availability says commissions should continue, but brokers should disclose all commissions and any other payments they will receive from the insurer.

“To the extent that broker remuneration is not transparent and that there may be conflicts associated with volume bonuses, commission overrides, profit shares, undisclosed fees that are additional to commissions and any other payments that are not fully disclosed, there is a strong case for rectification and elimination of conflicts,” The Trowbridge report says. “Full and clear disclosure of broker commissions and charges is an important starting point.”

Against that background, NIBA launched its new code of practice in March with a scheduled start on November 1. It represents a major overhaul of the previous code, and directly addresses such concerns.

“We know community expectations continue to evolve [and] to meet those expectations and raise standards of professionalism, the industry has responded by introducing a new code of practice that sets standards above the law, which further increases the transparency and disclosure of broker remuneration and conflicts of interest,” NIBA says in its submission to the Quality of Advice review.

Last week, however, NIBA said it will delay the introduction of Secton 6.1 of the new code – the section that deals with “disclosing remuneration” – for 12 months until November 1 next year, after brokers and IT providers made it apparent that some changes couldn’t be made in time.

The section says if a client is an individual or a small business and the broker is acting on their behalf, it will provide information about any remuneration, including commissions, or any other benefits the broker will or expects to receive as a result of providing the services.

The Corporations Act, referenced by the code, defines a small business as having less than 20 employees or less than 100 if a manufacturer. But considerable debate has occurred within broking circles around the definition and how it relates to current systems, which identify retail and wholesale clients.

The other parts of Section 6 will be introduced, along with the rest of the code, in November this year. That includes action against contingent remuneration, including volume-based commissions, profit-sharing arrangements or preferential remuneration, and a commitment that brokers won’t accept any non-monetary benefits in exchange for covered services “where doing so could reasonably be expected to influence the advice” provided.

Consumer groups are unimpressed with the delay to section 6.1. Last week the Financial Rights Legal Centre pointed out the deferment, and the length of time required, is not a great look just as the Quality of Advice review is proceeding. At the same time, there is always scrutiny on the ability of industries to self-regulate.

It’s been a long path to have the new code of practice ready, with the current version dating back to 2014. The rewrite has taken place as financial sectors awaited outcomes from the Hayne royal commission, and its recommendations leading to the Quality of Advice review now underway.

ICA compared the task of completing its code update against the background of the Hayne inquiry as similar to pitching a tent in the middle of a hurricane.

With the Quality of Advice review set to be completed, and with the new NIBA code of practice about to begin, it’s now a defining time for brokers.