NATIONAL INSURANCE BROKERS ASSOCIATION OF AUSTRALIA (NIBA) SUBMISSION ON:

Transcription

1 NATIONAL INSURANCE BROKERS ASSOCIATION OF AUSTRALIA (NIBA) SUBMISSION ON: CORPORATIONS AMENDMENT (FUTURE OF FINANCIAL ADVICE) BILL 2011 AND CORPORATIONS AMENDMENT (FURTHER FUTURE OF FINANCIAL ADVICE MEASURES) BILL December 2011 ABOUT NIBA NIBA is the vice f the insurance brking industry in Australia. NIBA represents 500 member firms and ver 2000 individual qualified practising insurance brkers (QPIBS) thrughut Australia. Brkers handle almst 90% f the cmmercial insurance transacted in Australia, and play a majr rle in insurance distributin, handling $10 billin in premiums annually and placing arund half f Australia s ttal insurance business. Over a number f years NIBA has been a driving frce fr change in the Australian insurance brking industry. It has supprted financial services refrms, encuraged higher educatinal standards fr insurance brkers and intrduced a strng independently administered and mnitred cde f practice fr members. The 500 member firms all hld an Australian financial services (AFS) licence under the Crpratins Act that enables them t deal in r advise n Risk Insurance prducts. EXECUTIVE SUMMARY NIBA s psitin can be summarised as fllws: The FOFA refrms arse as a result f issues identified in the Parliamentary Jint Cmmittee in its Inquiry int financial prducts and services in Australia (PJC Inquiry) which were clearly fcussed n the investment and superannuatin industries and financial planners. The general insurance and stand alne nn investment linked life insurance industries (Risk Insurance) were never intended t be and were nt a fcus f the Inquiry. 1

2 Any recmmendatins arising frm the Inquiry relating t Risk Insurance were limited in nature and arse in circumstances where an apprpriately fcussed review f Risk Insurance and relevant stakehlders had nt taken place. The Risk Insurance industry is distinctly different t the investment and superannuatin industries in significant ways. This has been shwn in the insurance specific amendments made since the intrductin f Chapter 7 f the Crpratins Act which was riginally enacted as a a ne size fits all regime. Such changes were all made nce the reality f the specialised nature f Risk Insurance was understd by Gvernment. NIBA is ppsed t the ne size fits all apprach t the regulatin f financial services in Australia, especially where prper analysis and cnsideratin f the issues unique t the Risk Insurance Industry has nt been prperly undertaken by Gvernment. NIBA s psitin is cnsistent with the principles f sund regulatin prmted by the OECD and in Australia by the Prductivity Cmmissin and the Cuncil f Australian Gvernments. The FOFA refrms were riginally develped n a ne size fits all apprach, affecting all areas f financial advice, even thugh the PJC Review cncentrated primarily n investments, superannuatin and financial planning. NIBA is pleased the Gvernment has recgnised the issues and unintended cnsequences that wuld ccur if the riginal prpsals were applied t Risk Insurance. NIBA remains cncerned that the prpsals will have unfrtunate and unintended cnsequences fr stand alne life risk insurance prducts. NIBA sets ut belw specific detail n the FOFA refrms and its principal cncerns. NIBA first deals with the Crpratins Amendment (Further Future f Financial Advice Measures) Bill 2011 as it has mst relevance t Risk Insurance. CORPORATIONS AMENDMENT (FURTHER FUTURE OF FINANCIAL ADVICE MEASURES) BILL 2011 The key changes affecting insurance are: Impsitin f a new best interests duty the current prpsal is that persns prviding persnal advice t retail clients n: general insurance prducts (like basic banking prducts) will be subject t a mre limited best interests duty when cmpared t ther prducts which is essentially similar t current bligatins. Whilst NIBA wuld have preferred the status qu t be maintained given the reasns nted further belw, it is satisfied that this apprach is nt inapprpriate in the circumstances. 2

3 stand alne life Risk Insurance prducts will be subject t the mre nerus new duty that will apply t advisers f investment prducts New bligatin t give pririty t the interests f clients this requirement will: nt apply if the subject matter f the advice sught by the client is slely a general insurance prduct. There is n carve ut fr life Risk Insurance. New cnflicted remuneratin ban a carve ut frm the ban applies fr cnflicted remuneratin benefits: whether mnetary r nn mnetary given t a licensee r representative slely in relatin t a general insurance prduct. Remuneratin that is mixed may be an issue. which are mnetary fr stand alne life Risk Insurance (ie excluding a grup life plicy fr members f a superannuatin entity as defined r a life plicy fr a member f a default superannuatin fund). Life Risk Insurance is caught in relatin t cnflicted nn mnetary benefits t which new rules apply. In relatin t general insurance, NIBA is pleased that the Explanatry Memrandum specifically ntes that general insurance prducts are mre widely understd by custmers, leading t a lwer risk f custmer detriment. Whilst NIBA wuld have preferred the status qu t be maintained given the reasns nted further belw, it is satisfied that this is the best result it culd expect in circumstances where: general insurance was nt the subject f the PJC Inquiry the Minister and Gvernment s agenda was clearly t push thrugh brad brush refrms in reactin t the investment industry s impact n cnsumers withut any real fcus r understanding f Risk Insurance and its unique issues cnsideratin f whether t catch general insurance was added as an aside withut a prper review (which investment prducts had the benefit f) and caught up in the prcess. NIBA believes there is n lgical reasn why stand alne life Risk Insurance prducts shuld nt be in the same psitin as general insurance prducts. NIBA sets ut further belw why it believes the current apprach is nt apprpriate. NIBA believes there is n lgical reasn as t why this shuld be the case given the nature f such prducts and submits the psitin be recnsidered. 3

4 PRINCIPAL NIBA CONCERNS AGAINST THE FOFA PROPOSALS BEING APPLIED TO RISK INSURANCE (IE GENEAL INSURANCE AND STAND ALONE LIFE RISK INSURANCE) Federal Gvernment had nt cnducted a Risk Insurance market review r cst benefit analysis f the Risk Insurance market The PJC Inquiry was clearly fcussed n a review f nn Risk Insurance type prducts and services, in particular, investment prducts and services. There was n identified market failure, and n identified need t refrm the bligatins that currently exist in relatin t Risk Insurance advisers. Investment advice and planning deals with assets, risks assciated with the investment f thse assets, and the ptential rates f return n the investment f thse assets. The utcme f the transactin is the eventual return f the capital invested tgether with the expected interest accrued. Risk insurance deals with the assessment and management f risk, and the transfer f risk t ther parties in apprpriate circumstances. The nature f the transactin, the nature f the prducts, and applicable law and the nature f the advice that is prvided are all very different t the nature f any investment transactin. The utcme f the transactin in mst circumstances is n further actin if an insured event has nt ccurred, the plicy expires and the cver cncludes. Where an insured event has ccurred, the insurance prmise is hnured and the insurance plicy respnds, nrmally with the payment f an amunt far greater than the insurance premium. The Minister stated very clearly in relatin t the FOFA refrms this is abut building cnfidence in financial advice and the wealth management industry, such that all Australians wh wrk hard their whle life, pay their taxes, save their mney, will have a decent next egg alng with their huse when they retire (Inside Business, ABC TV, 4 September 2011). The entire fcus f these refrms has been financial planning and wealth management, nt Risk Insurance. It is cntrary t gd public plicy, and gd regulatry plicy in particular, t apply such prpsals t an area f activity that is ttally different t the area where cncerns have been identified. The Risk Insurance industry has nt had the pprtunity f a review similar t that undertaken in relatin t financial planning and wealth management, r t make submissins in relatin t perceived issues r cncerns t the same extent as the financial advisry industry has during the PJC Inquiry prcess. Whilst NIBA ntes that the Federal Treasury FOFA prcess has generally been cnsultative, the main fcus f that cnsultatin has always been n investment prducts and superannuatin. 4

5 In additin, during these discussins, the scpe f the prpsed statutry best interests duty has remained unclear until the recent release f the draft legislatin. Whilst NIBA has been part f the Treasury FOFA cnsultatin prcess, the fact that the Risk Insurance industry has nt been the subject f the same detailed review as financial planners puts it at a significant disadvantage. NIBA s view is that the perceived benefits fr retail clients advised by insurance brkers in relatin t Risk Insurance are likely t be utweighed by the detriments assciated with the impsitin f a statutry duty n insurance brkers. There is n evidence f any prblem in the Risk Insurance market akin t that identified fr financial planners n which the PJC Inquiry was actually fcussed and there are significant differences between the Risk Insurance market and investment prducts N evidence has been prvided by the PJC Inquiry r Federal Gvernment f any fundamental r systemic prblems with the prvisin f advice in relatin t the Risk Insurance industry that are f a nature that wuld justify the intrductin f a new suite f statutry refrms, and the resulting csts and market impact assciated with it. A recent industry review by ASIC fund n such prblems and the regime (effectively Chapter 7 f the Crpratins Act and general law) is wrking well fr insurance brkers and their retail clients. In particular, this is evidenced by the lw level f disputes referred t the Financial Ombudsman Service (FOS) in relatin t insurance brkers. Insurance brkers are effectively being tarred by the same brush as financial advisers fr n gd reasn. The Risk Insurance (in particular general insurance) and investment and superannuatin industries and their prducts, structure and risks are in reality significantly different. Fr example, insurance is generally a shrt term prduct and is ften seen as a grudge purchase given it prtects a retail client frm future risk that in mst cases will nt ccur rather than ptentially earning them mney. This distinctin has been acknwledged in all cmparable regulatry regimes wrldwide and has als been recgnised in the Federal Gvernment s decisin nt t extend the financial adviser s ban n cnflicted remuneratin t Risk Insurance advisers (save fr life insurance mixed with superannuatin). By applying the new bligatins t insurance brkers fr Risk Insurance prducts: there will be a significant increase in the cmpliance burden carried within insurance brking ffices, resulting in additinal csts (in particular there is real ptential fr an increase in the cst f prfessinal indemnity) there will be less persnal advice being prvided fr n real cnsumer benefit 5

6 Recent disaster events have shwn that there is real value in retail custmers having ready access t persnal advice prvided by Australian Financial Services Licensees such as insurance brkers. There is n substitute fr the prvisin f advice frm qualified advisers such as insurance brkers, and where an unfrtunate event ccurs in having an insurance claim practively managed. Despite Federal Gvernment attempts t simplify insurance dcumentatin (which have cntinued since the intrductin f the financial services refrm legislatin), the reality is that an insurance prduct is, by its very nature, cmplex and difficult fr many t understand. Many cnsumers are nt inclined/r well equipped t read/understand them. The services f a prfessinal adviser can g a lng way t ensuring retail custmers have gd advice and get the cverage they need at a prper price, and in reducing claims issues. Retail custmers have access t this advice withut having t pay fees r charges. The insurance brker is nly remunerated if the custmer decides t prceed and purchase a plicy. Mst imprtantly, the insurance brker acts as the representative f the plicyhlder in these transactins, and is nt the representative f the insurance cmpany (unless this is made very clear t the client prir t the transactin prceeding). It wuld be extremely unfrtunate if these prpsals were t perate in a way that reduces access t cmpetent and prfessinal advice fr retail custmers. NIBA s assessment f the prpsals is that this is likely t ccur. Risk Insurance is already subject t substantial legislative and regulatry interventin Prudential regulatin f insurers (Insurance Act) Prtectin f plicyhlder interests (Insurance Cntracts Act), including the statutry bligatin f Utmst Gd Faith Regulatin f risk insurance advice and intermediaries (Crpratins Act, previusly the Insurance (Agents and Brkers) Act). The adequacy (r therwise) f these regulatry regimes has nt been examined as part f the current FOFA refrm prgram. Unless and until this examinatin ccurs, NIBA believes it is nt apprpriate t add further regulatry burden in this area f financial services. there is likely t be an increase in under/nn insurance which is f real detriment t the cmmunity there is likely t be a reductin in cmpetitin in the market and the chices available t cnsumers that insurance brkers bring t the equatin; and 6

7 any increased csts may be passed t cnsumers fr little added benefit. NIBA believes that because f the abve, insurance brkers prviding persnal advice n Risk Insurance prducts shuld nt be caught by the new requirements. NIBA has never had any bjectin t the issue f financial advice in Risk Insurance being mnitred by the Gvernment r ASIC, and if necessary having a prper review within an agreed perid f time. T date, hwever, there has been n evidence f any need fr such a review. If any issues f cncern with the peratin f the current retail client prtectins in relatin t Risk Insurance are identified, prper and apprpriate prpsals fr refrm culd then be develped in cnsultatin with the industry. This wuld als allw time fr the impact f any prpsed statutry duty t be better analysed, wuld n dubt reduce the cst impact f any new statutry duty n the market and wuld hpefully avid any reductin in the prvisin f persnal advice services t the cmmunity. CORPORATIONS AMENDMENT (FUTURE OF FINANCIAL ADVICE) BILL 2011 Onging fee requirements The prpsed nging fees requirements apply where the adviser prvides persnal advice t a retail client and the client pays a fee which falls within the definitin f an nging fee arrangement. In the Risk Insurance cntext, fees paid t insurance brkers fr arranging general and stand alne life risk insurance shuld nt be caught as either the ttal f any fee is specified in the arrangement r is nt dependent n any amunt invested r the amunt in relatin t which persnal advice is given. The rigins f the Opt in prvisins is clearly nted as being t address the issue f getting peple mre engaged with their investment activities J Murphy (Department f Treasury) Evidence t the Ecnmics Legislatin Cmmittee Senate Estimates Hansard 19 Octber 2011 p 104. The Explanatry memrandum reinfrces this in Chapter 3 Regulatry impact statement which nly talks f investment advice see in particular 3.5 where the fcus is nt n pure risk insurance. It was never intended t apply t Risk Insurance and althugh n express carve ut has been included it appears at this stage that Risk Insurance will nt be affected. 7

8 ASIC Banning Pwers NIBA s principal cncern is that there is n definitin f likely t cntravene r likely t breach which is likely t cause cnfusin fr industry. Mre guidance is required frm Gvernment r ASIC n this. There is n clear standard r prf and ASIC at a minimum shuld be required t set ut hw it intends t apply these new pwers. If yu wuld like t discuss any aspect f this matter further d nt hesitate t cntact us. Dallas Bth Chief Executive Officer Direct: +61 (0) dbth@niba.cm.au Natinal Insurance Brkers Assciatin f Australia 8