Ban all remaining conflicted remuneration: Choice submission

Consumer advocacy group Choice wants a ban on all remaining conflicted remuneration in the advice industry, including commissions for general insurance, consumer credit insurance and life insurance.

The group says “conflicts” arising from existing commissions lead to advisers recommending products that are of poor value or even harmful to their clients.

“Choice recommends the removal of the exemption for monetary and non-monetary benefits for general insurance and consumer credit insurance,” the group says in its submission to Treasury’s Quality of Advice issues paper.

“The [Hayne] royal commission revealed that these carve-outs lead to poor consumer outcomes, with consumers being sold into general insurance that is inappropriate to their needs.

“As with other forms of conflicted remuneration, as long as advisers are incentivised to sell such products, consumers will continue to experience poor outcomes.”

The Quality of Advice review, a recommendation by the Hayne royal commission, is looking at the remaining exemptions to the ban on conflicted remuneration including in general and life insurance as part of its examination of the advice industry. A report is expected to be provided to the Government by December 16.

Choice pushed its case for the removal of the remaining exemptions by listing a 2019 review of consumer credit insurance (CCI) that the Australian Securities and Investments Commission (ASIC) undertook.

The ASIC review found that for CCI sold with credit cards, consumers received only 11 cents in paid claims for every dollar paid in premiums for the financial years 2011 to 2018.

Choice says the Australian Competition and Consumer Commission in its review of the insurance market in northern Australia also recommended the exemption for general insurance be removed as it gives rise to unacceptable conflicts of interest.

The group also cites a separate ASIC study to support its push for a ban on life commissions. It says the ASIC 2014 retail life insurance review found “systemic” problems, with 45% of advisers who were paid through up-front commissions failing to comply with the law.

It says the legislative changes to both cap upfront commissions and to introduce clawbacks are an improvement from previous arrangements but points out the reforms “do not remove the conflict”.

“They simply make it slightly less profitable,” the Choice submissions says. “Given the evidence of consumer harm related to commission-based sales, commissions need to be permanently banned, as they are for other types of financial advice.”

The National Insurance Brokers Association in its submission says banning commissions in general insurance would lead to “significant detriment” not only on the broking profession, but also on consumers.

The Insurance Council of Australia says the impact of recent reforms such as design and distribution obligations should be assessed before deciding whether the conflicted remuneration for general insurance products should be removed.

Click here for the Choice submission.