NATIONAL INSURANCE BROKERS ASSOCIATION OF AUSTRALIA (NIBA) SUBMISSION ON CORPORATIONS AMENDMENT (STREAMLINING OF FUTURE OF FINANCIAL ADVICE) BILL 2014

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1 NATIONAL INSURANCE BROKERS ASSOCIATION OF AUSTRALIA (NIBA) SUBMISSION ON CORPORATIONS AMENDMENT (STREAMLINING OF FUTURE OF FINANCIAL ADVICE) BILL 2014 ABOUT NIBA NIBA is the vice f the insurance brking industry in Australia. NIBA represents 400 member firms and ver 3000 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 an estimated $18 billin in premiums annually and placing arund half f Australia s ttal insurance business. Insurance brkers als place substantial insurance business int verseas markets fr large and special risks. 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 400 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. NIBA appreciates the pprtunity t be able t prvide cmments n the Crpratins Amendment (Streamlining f Future f Financial Advice) Bill ABOUT INSURANCE BROKERS The rle f insurance brkers The traditinal rle f insurance brkers is t: assist custmers t assess and manage their risks, and prvide advice n what insurance is apprpriate fr the custmer's needs; assist custmers t arrange and acquire insurance; and assist the custmer in relatin t any claim that may be made by them under the insurance. In ding the abve the insurance brker acts n behalf f the custmer as their agent. Insurance brkers ffer many benefits t custmers and cnsumers: assistance with selecting and arranging apprpriate, tailred insurance plicies and packages 1

2 detailed technical expertise including knwledge f prices, terms and cnditins, benefits and pitfalls f the wide range f insurance plicies n the market; assistance in interpreting, arranging and cmpleting insurance dcumentatin; experience in predicting, managing and reducing risks; and assistance with claims and a higher success rate with settlements (abut 10 per cent higher than claims made withut a brker). In limited cases insurance brkers may act as agent f the insurer nt the insured but where such a relatinship exists the custmer is clearly advised up frnt. EXECUTIVE SUMMARY NIBA supprts any reductin in cmpliance csts fr small business, financial advisers and cnsumers wh access financial advice. The rle f an insurance brker is and shuld be distinguished frm ther financial services advisers given the specialised nature f the insurance market in which they perate. It is a cmmn cause f cncern fr NIBA members that they are misunderstd by Gvernment and bundled with ther financial services advisers. The trend unfrtunately cntinues with the Regulatin Impact Statement Future f Financial Advice amendments Nvember 2013 Chart 1, which incrrectly summarises the Financial Services industry that is described as including insurance. The FOFA refrms were a gd example f this where insurance brkers were indirectly caught up in the review f issues arising in relatin t financial planners. Ultimately the Gvernment and Treasury and ther key stakehlders acknwledged insurance brkers advising n general and life risk insurance shuld be treated differently as there was n evidence f any market issues f significance. Whilst NIBA wuld have preferred the status qu t be maintained this was the best result it culd expect in the circumstances giving rise t the FOFA refrms. NIBA generally supprts the prpsed changes in the Bill. Hwever, there are a number f areas f cncern which need t be addressed. The can be summarised as: priritising client s interests s961j The previus Gvernment failed t prperly amend the general insurance carve ut in the FOFA legislatin regarding the priritisatin f clients interests t ensure that where persnal advice is given n mre than just general insurance, the general insurance aspect f the advice will nt be caught by the relevant bligatin. 2

3 The same issue was identified and fixed by way f regulatins in relatin t the best interest duty and cnflicted remuneratin sectins but nt fr the priritising clients interest sectin. The missin culd nt be fixed by reasn f the change in Gvernment and shuld nw be addressed in the current Bill t achieve the intended riginal result. NIBA s letter t the Assistant Treasurer n this issue dated 24 December 2013 refers. Scaling f advice NIBA supprts the best interest duty changes whilst nting they remain by their nature smewhat unclear. In relatin t the ability t agree n the scpe f advice, NIBA ntes any attempts by prduct issuers r related prduct distributrs t prvide scaled persnal advice shuld be mnitred given the special cnflicts f interest that may arise in such cases. ADI changes relating t Cnsumer Credit Insurance (CCI) The prpsed ADI changes made in relatin t the best interest duty and cnflicted remuneratin prvisin put ther advisers in life CCI at a disadvantage t ADI advisers as they d nt get the same relief as ADI advisers prviding the same services. There is n explanatin fr this special treatment in the Draft Explanatry Memrandum. An even playing field shuld be created fr all advisers in relatin t life CCI. Cnflicted remuneratin changes NIBA supprts these prpsals, ther than the prpsal affecting ADI advisers prviding persnal advice n CCI which creates an uneven playing field. Timing NIBA has n issue with the prpsed timing assuming the changes are implemented in an enfrceable way. INSURANCE BACKGROUND TO FOFA REFORMS 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. 3

4 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 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 intended t be 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 any 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 have nt been prperly undertaken by Gvernment. Such a mdel invlves implementing brad requirements based n a rushed plitical agenda, typically n the basis that tidy ups can be made in regulatins afterwards t manage anything nt identified in the rushed prcess. 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. Like the Crpratins Act, 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 eventually recgnised the issues and unintended cnsequences that wuld ccur if the riginal prpsals were applied t risk insurance. NIBA sets ut the main issues identified by its members in relatin t the prpsed Bill. PRIORITISATION OF CLIENTS INTERESTS SECTION 961J The previus Gvernment failed t prperly amend the general insurance carve ut in the FOFA legislatin regarding the priritisatin f clients interests t ensure that where persnal advice is given n mre than just general insurance, the general insurance aspect f the advice will nt be caught by the relevant bligatin. The use f the wrd slely in the sectin des nt appear t carve ut persnal advice in relatin t general insurance in circumstances where ther advice r remuneratin may have been received in relatin t nn excluded prducts. The same issue was identified and fixed by way f regulatins in relatin t the best interest duty and cnflicted remuneratin sectins but nt fr the priritising clients interest sectin. 4

5 NIBA raised this with Gvernment which acknwledged that the intent was fr the priritising clients interests bligatin nt t apply t any persnal advice n general insurance even if advice was being given n ther financial prducts. Hwever due t the upcming electin n change culd be made. The new amendments can nw fix this prblem. NIBA s letter t the Assistant Treasurer dated 24 December 2013 prvides further details in relatin t this matter. STATUTORY BEST INTERESTS OBLIGATION (S961B) The changes seek t facilitate scaled advice by limiting the scpe f investigatins required f a persnal adviser and explicitly allwing clients and advisers t agree n the scpe f any scaled advice prvided. The intent f the change as described is t ensure [p]rviders need nly investigate the client s bjectives, financial situatin and needs that are relevant t the scaled advice t be prvided. The cncerns with the current requirements are that: prviders are required t undertake a fulsme investigatin int the client s bjectives, financial situatin and needs befre any scaled advice can be prvided; and there is uncertainty n whether clients and advisers can agree n the scpe f the advice t be prvided. The scaled advice changes are designed t reduce the current bligatins applicable t bth general and life risk insurance brkers/advisers prviding persnal advice t retail clients. The Bill specifically ntes that clients and advisers are explicitly permitted t agree n the scpe f any scaled advice prvided. What is scaled advice is nt defined in the Bill but the Draft Explanatry Memrandum states by way f explanatin that: Scaled advice is advice abut a specific area f a client s needs, such as insurance r superannuatin. This cntrasts hlistic advice which is anther advice mdel ffered by prviders. Under the hlistic mdel, a prvider makes extensive enquiries abut their client s circumstances, needs and bjectives and prvides advice t their client n all aspects f their financial circumstances in a full financial plan. Given that scaled advice is abut a specific issue r issues, it is ften cheaper than traditinal hlistic advice and, as a result, enables many cnsumers t access advice that they culd therwise nt affrd. 5

6 It fllws that, because the scpe f advice is limited under a scaled advice mdel, the investigatins required t be undertaken by an advice prvider in rder t prvide scaled advice be als limited t what is relevant t prviding advice that is in the client s best interests n the particular issue r issues. A prvider and their client will discuss the scpe f any scaled advice t be sught by the client as part f their initial discussin. This discussin may ccur at the same time the client disclses sme preliminary infrmatin t the prvider n their bjectives, financial situatin and needs, but befre the prvider cmmences their investigatin int the client s relevant circumstances in rder t frmulate the advice. NIBA ntes that the changes will be useful in reducing the ptential expsure f advisers under the legislatin, but care will need t be taken t ensure apprpriate investigatins and advice is prvided and the general law bligatins n advisers must nt be ignred. This is especially the case in relatin t advisers acting fr r related t prduct issuers. NIBA ntes that it wuld be a brave prduct issuer that sells a prduct and at the same time gives advice n whether it is apprpriate t the client r nt (given the inherent cnflict f interest and liability expsure that wuld arise fr the advice ver and abve the cntract terms). NIBA believes the EM culd be better qualified t avid cnfusin, as the end advice must still be apprpriate and ther bligatins beynd the Crpratins Act (e.g. misleading and deceptive cnduct and duty f care etc) wuld need t be cnsidered by any insurer/bank giving persnal advice t a custmer, as is the case fr insurance brkers. CLARIFICATION OF THE CIRCUMSTANCES WHEN AN AGENT OR EMPLOYEE OF AN ADI MAY ACCESS THE REDUCED BEST INTERESTS DUTY An agent r emplyee f an ADI is currently in the same psitin as an insurance brker/adviser when the nly subject matter f the advice sught by the client is in relatin t a basic banking prduct, a general insurance prduct r bth. The applicatin f the limited best interest duty fr ADI emplyees is prpsed t be extended t include a cnsumer credit insurance (CCI) prduct in the mix, as defined in the Insurance Cntracts Act 1984 (Cth). The definitin in the Insurance Cntracts Act includes CCI that is life r general insurance. The restrictin f the duty in this regard des nt appear t have been applied t ther advisers in life CCI (wh are subject t the full duty fr such prducts) which seems t create an uneven playing 6

7 field that needs t be addressed. There is n explanatin r justificatin fr this special treatment in the Draft Explanatry Memrandum r Regulatin Impact Statement. CONFLICTED REMUNERATION BAN MONETARY AND NON MONETARY (s963a etc) NIBA supprts the limitatin f the ban in relatin t persnal advice t retail clients and nt general advice, a psitin NIBA had taken in riginal cnsultatin n FOFA. NIBA supprts all f the ther changes ther than thse in relatin t the Basic banking prduct exemptin. Sectin 963D currently prvides that a benefit is exempt frm the ban n cnflicted remuneratin if the benefit relates t a basic banking prduct and the agent r emplyee f an ADI, at the time f prviding advice n the basic banking prduct, des nt prvide financial prduct advice n any ther financial prduct. Regulatin 7.7A.12H f the Crpratins Regulatins allws access t the exemptin where the agent r emplyee als prvides financial prduct advice n a general insurance prduct. The basic banking prduct exemptin in the Act is prpsed t apply if, at the time f prviding advice n a basic banking prduct, the agent/emplyee f an ADI als prvides financial prduct advice n a general insurance r a cnsumer credit insurance prduct. Therefre, in rder t have access t the exemptin, the agent r emplyee, at the time f prviding advice n the basic banking prduct, must nt prvide advice n financial prducts ther than a general insurance r a cnsumer credit insurance prduct. Again, the ADI s appear t be receiving special treatment regarding CCI. NIBA ntes that the Gvernment refers t CCI as a simple well understd prduct which is cnsistent with NIBA s view. LIFE RISK INSURANCE GENERALLY In relatin t stand alne life risk insurance prducts (ie thse withut any investment cmpnent), NIBA believes they shuld be treated in the same way as general insurance, as cnceptually they are extremely similar and d nt have the same characteristics f investment prducts. NIBA s psitin (as put t the previus Gvernment) 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. 7

8 The risk insurance industries were never intended t be and were nt a fcus f the Inquiry. 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. Under FOFA, life risk insurance is subject t the same: best interest duty and bligatin t give pririty t the interests f clients as investment prducts; and mnetary cnflicted benefits carve uts as general insurance but nt fr nnmnetary cnflicted benefits. NIBA believes there is n lgical reasn why life risk insurance prducts (withut any investment cmpnent) shuld nt treated in the same way as general insurance prducts, especially given: the custmer risk is nt the same as under an investment based prduct. 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. life risk insurance was nt the subject f the PJC Inquiry; the Gvernment s agenda was clearly t push thrugh brad refrms in reactin t the investment industry s impact n cnsumers withut any real fcus r understanding f risk insurance and its unique issues; 8

9 cnsideratin f whether t catch risk insurance was added as an aside withut a prper review (which investment prducts had the benefit f) and caught up in the prcess; 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; there was n cnsultatin with NIBA in relatin t the sudden shift in psitin that saw life risk insurance being caught. This was despite the fact that NIBA had been the entity principally lbbying in the cnsultatin prcess in this regard. Other entities such as the Financial Planning Assciatin f Australia were principally (and understandably) fcussed n the investment prduct issues which affected the majrity f its members. NIBA s principal cncern was fr members that ffered stand alne life risk insurance and the significant effect the new duties and bligatins and prhibitins regarding remuneratin wuld have. the applicatin f the new bligatins t insurance brkers fr life risk prducts: results in 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); may result in less persnal advice being prvided fr n real cnsumer benefit; will mst likely cause an increase in under/nn insurance which is f real detriment t the cmmunity; will mst likely cause a reductin in cmpetitin in the market and the chices available t cnsumers that insurance brkers bring t the equatin; and will mst likely cause any increased csts t be passed t cnsumers fr little added benefit. NIBA believes that because f the abve, insurance brkers prviding persnal advice n life risk insurance shuld at least be treated in the same way as general insurance. 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. 9

10 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. 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 10