Conflicted remuneration: advice review recommends keeping commissions

The Quality of Advice Review has proposed keeping general insurance commissions exempt from the ban on conflicted remuneration, with an additional layer of protection for consumers requiring brokers to first obtain written consent from retail clients for commissions.

The Review acknowledges the existing commission model in some cases does lead to a “conflict” for brokers and that this “conflict creates a real risk” that the quality of the advice provided is not as good as it would be if a client had paid directly for the advice.

But the Review says the risk that consumers may not be getting quality advice from brokers who are paid commissions has been “diminished” by a number of recent changes to the law.

The changes – made after the Hayne royal commission’s final report in 2019 – include measures in relation to anti-hawking, deferred sales of add-on insurance, design and distribution obligations, and the commission caps on consumer credit insurance.

“The general insurance industry is changing, voluntarily and in response to recent changes to the law,” the Review says in its newly published Conflicted Remuneration Paper.

“We have been told that, as a result of these changes, many of the key contributors to the misalignment between industry incentives and consumer interests such as volume bonuses and junk products have ceased or will shortly cease.”

The Review, led by Reviewer Michelle Levy, says in the paper it “has been persuaded that there are some benefits and some circumstances in which benefits which are reasonably likely to influence financial product advice should be retained, or should be retained subject to an additional requirement that the client provides their consent to the benefit”.

“We have been told that brokers play an important role in the general insurance market by providing consumers with expertise, geographical reach, access to niche and complex products and claims assistance,” the Paper says.

“Where the benefits relate to general insurance… insurance brokers continue to play an important role in giving consumers access to financial product advice about what can and should be valuable financial products.”

The Paper says requiring brokers who provide personal advice in relation to general insurance products to have approval from clients that they can be paid a commission will help consumers make “informed” decisions.

The consent – which applies only to retail clients – must be in writing, stating the insured is aware the broker is getting a commission and other benefits from the product issuer for arranging the insurance. The Corporations Act defines a retail general insurance client as an individual or a small business that has been provided with covers including motor vehicle, home building, home contents, sickness and accident, travel and consumer credit insurance.

“If an adviser or broker will receive a benefit for the sale of the general insurance product or consumer credit insurance they recommend to their client, they should have an obligation to tell the client about the benefit and the client should have the opportunity to consent (or not) to the provision of that benefit,” the Paper says.

National Insurance Brokers Association CEO Phil Kewin says the theme of the Paper is “broadly supportive” but has flagged the written consent proposal as “possibly problematic” for brokers.

“We need to flesh out what that means. Sometimes clients just don’t respond,” Mr Kewin told insuranceNEWS.com.au. “If you detail the commission on the invoice and then the premium is paid, does that count as consent? These are questions that we can work through.”

Other industry observers say the written consent proposal has not set out how it will be carried out in practice and also what happens if a client says “no” to the broker getting a commission.

McCabes Principal Mathew Kaley says the Paper is essentially leaving the general insurance exemption from the ban on conflicted remuneration in place with one carveout: retail clients must consent to their brokers getting a commission.

Click here for the report.