Life Insurance and Advice Working Group

Transcription

1 RETAIL LIFE INSURANCE ADVICE Life Insurance and Advice Working Group ISA SUBMISSION Issue date 3 February 2015 VN SB1578

2 ABOUT INDUSTRY SUPER AUSTRALIA Industry Super Australia is a research and advocacy body for Industry SuperFunds. ISA manages collective projects on behalf of a number of industry super funds with the objective of maximising the retirement savings of over five million industry super members. Please direct questions and comments to: Robbie Campo Deputy Chief Executive, ISA Christian Clark Research Analyst ISA Pty Ltd ABN Corporate Authorised Representative No of Industry Fund Services Ltd ABN AFSL ISA Submission to Life Insurance and Advice Working Group 1

3 SUBMISSION TO LIFE INSURANCE AND ADVICE WORKING GROUP Contents 1. Introduction 3 2. Conflicted Remuneration is the root cause of poor advice ASIC Report underscores the long recognised significant structural tensions in the advice industry Conflicted remuneration leads to poor advice Conflicted Remuneration and loss of trust in the financial advice industry 5 3. A genuine reform agenda for professionalising financial advice Consequences of entrenched conflicts for reform Underinsurance persists under sales commissions Options for Reform 7 References 9 ISA Submission to Life Insurance and Advice Working Group 2

4 SUBMISSION TO LIFE INSURANCE AND ADVICE WORKING GROUP 1. Introduction ISA welcomes the opportunity to comment on the Life Insurance and Advice Working Group s Interim Report on Retail Life Insurance Advice (the Interim Report). Conflicted remuneration structures are the primary cause of poor advice in Australia, and feature in all the major advice scandals spanning the last decade. Conflicted remuneration, if allowed to remain in any guise, will continue to undermine the quality of advice and insurance outcomes for clients. ISA recognises the problem of underinsurance, and supports measures which increase insurance coverage and the access to affordable financial advice that is in the client s best interest. The Interim Report continues to maintain that conflicted remuneration has a place in financial advice, despite the extensive body of evidence documenting the ill effects of conflicted remuneration. ISA submits that by failing to work towards the phasing out of conflicted remuneration in financial advice (and dismissing the nil commission or fee for service model) the Life Insurance and Advice Working Group is failing to address the root cause of poor financial advice. As a result, it is likely that this process will not succeed in steering the insurance industry toward the stated objective of ensuring Australians are adequately insured and receive world class financial advice. 1 A transition towards phasing out commission-based remuneration is the only long-term sustainable solution compatible with a professional financial advice industry. 2. Conflicted Remuneration is the root cause of poor advice 2.1 ASIC Report underscores the long recognised significant structural tensions in the advice industry The Life Insurance and Advice Working Group was established in response to the ASIC Review of Retail Life Insurance Advice (Report 413) 2. The report was released in October The ASIC Review found that: 1 John Trowbridge, Interim Report on Retail Life Insurance Advice, Life Insurance and Advice Working Group, 17 December 2014, p iii. 2 ASIC, Report 413: Review of retail life insurance advice, October 2014 ISA Submission to Life Insurance and Advice Working Group 3

5 More than a third of advice (37%) did not meet the laws relating to appropriate advice, a result that ASIC describes as an unacceptable level of failure 96% of the poor advice was given by advisers paid under upfront commission models Where an adviser is paid under an upfront commission model it has a statistically significant bearing on the likelihood of that adviser giving advice that did not comply with the law. Above all, the Review demonstrated the prevalence of mis-selling in the life insurance advice industry and highlighted the need for stronger consumer protection in this sector. In the Report, ASIC state that: Our findings confirm that adviser incentives affect the quality of advice consumers receive. 3 A remuneration arrangement tied to a product sale creates an incentive for the adviser to make a sale, rather than provide non-product-specific advice or strategic advice for which the adviser may not be paid. 4 ASIC goes onto to recommend that AFS licensees ensure that remuneration structures support goodquality advice that prioritises the needs of the client. 5 The ASIC Report underscores the long recognised significant structural tensions 6 which are inherent in the financial advice industry: the industry has and continues to both provide advice to clients, and act as a sales and distribution channel for product providers. Due to the fundamental nature of sales commissions to incentivise the sale of a product rather than provide quality advice, it can never be in the client s best interest to receive advice under the commission based remuneration structures. 2.2 Conflicted remuneration leads to poor advice The conclusions reached by ASIC Report 413 regarding poor advice quality and the primary role played by conflicted remuneration structures are not new. Research over the past decade has shown that an unacceptably high proportion of financial advice continues to be of poor quality. In 2003, an ASIC survey found only 50 per cent of financial advice was at an acceptable level. 7 In 2012, only 58 per cent of retirement advice surveyed was at an acceptable standard. 8 The main features of poor advice in the surveys were (i) inadequately assessing or addressing the client s personal circumstances, needs or objectives; (ii) conflicted remuneration structures (e.g. product commissions and percentage asset-based fees) affecting the type of advice and recommendations, and the quality of advice given; and (iii) failing to provide adequate justification for recommendations. In 2006, ASIC found that superannuation advice was three to six times more likely to be unreasonable in the presence of a commission or the recommendation of an associated product. 9 A follow-up investigation 3 ASIC, Report 413, p ASIC, Report 413, p ASIC, Report 413, p 7. 6 Parliament Joint Committee on Corporations and Financial Services, Inquiry into Financial Products and Services in Australia, November 2009, p ASIC (2003) Report 18 Survey on the quality of financial planning advice, 5 8 ASIC (2012) Report 279 Shadow shopping study of retirement advice, p 8 9 ASIC (2006) Report 69 Shadow shopping survey on superannuation advice, p 8. Note: ASIC (2006) Report 69: Shadow shopping survey on superannuation advice, April 2006, did not publish advice quality measures equivalent to adequate or acceptable. ISA Submission to Life Insurance and Advice Working Group 4

6 into retirement advice in 2012 found that the scoping of advice was only adequately disclosed in half of all advice examples where limited advice was provided, while in several instances, particular topics were excluded from the scope of the advice, to the potential benefit or convenience of the adviser, and to the significant detriment of the client Commonwealth Financial Planning A recent case study of insurance industry practice Between 2006 and 2010, multiple financial planners at Commonwealth Financial Planning Limited failed to meet required compliance standards and provided advice that was irresponsible, self-serving and incidental to client interests. 11 In many instances, the poor advice concerned life insurance products, the mis-selling of which were documented in the ABC s Four Corners report Banking Bad. The ABC report exposed the tragic consequences for individual consumers of a business culture built on commissions and described as profit at all cost. The airing of Banking Bad cascaded into a series of media reports and culminated in a parliamentary inquiry. 12 The Inquiry found that in the case of Commonwealth Financial Planning Limited: Advisers deliberately neglected their duties and placed their personal interests far above the interests of their clients. 13 Life insurance products featured among the products which were mis-sold, due to the availability of commissions and other incentives for the advisers recommending them. 2.3 Conflicted Remuneration and loss of trust in the financial advice industry The consumer response to poor quality advice and financial advice scandals has been a high level of mistrust of the financial advice industry. In 2012, a State Street survey found about two-thirds of investors do not believe that advice providers act in the best interests of their client. 14 While, Investments Trends found that 87 per cent of respondents in a 2013 survey, stated fees and conflict of interests as reasons why they distrust financial advisers. 15 A 2013 survey conducted by Newspoll found that over 90 per cent (90.9 However, it did find that 21% of advice was not compliant with the law and that in 46% of cases where a Statement of Advice was required to be provided, it was not 10 ASIC (2012) Report 279 Shadow shopping study of retirement advice, p 12-13, and p The Senate Economics References Committee, Performance of the Australian Securities and Investments Commission, June The Senate Economics References Committee Inquiry into The performance of the Australian Securities and Investments Commission, June The Senate Economics References Committee, Performance of the Australian Securities and Investments Commission June 2014, p xviii 14 State Street and Centre for Applied Research, The Influential Investor: How investor behavior is redefining performance, November 2012, p. 20, quoted in ASIC (2012) Future of Financial Advice: Best interests duty and related obligations, December 2012, p Investment Trends (2013) Advice & Limited Advice Report September 2013, p 117. ISA Submission to Life Insurance and Advice Working Group 5

7 per cent) of people agree there should be laws that require financial planners and advisers to only provide advice or make investments that is in the best interests of their clients A genuine reform agenda for professionalising financial advice 3.1 Consequences of entrenched conflicts for reform The deep-rooted and persistent presence of commissions within the insurance industry has resulted in the industry being hijacked by these pernicious remuneration structures. Commissions, as noted by ASIC, create an incentive for the adviser to make a sale, rather than provide non-product-specific advice or strategic. It is the nature of commission per se, not their extent (upfront, level, hybrid et cetera), that incentivised sales rather than advice. The effect of commissions is to undermine the quality of advice and sever any direct relation between the quality of the advice given and the remuneration paid for that advice. Commissions are more expensive than fee-for-service in relation to purchasing insurance products, and have persisted in large partly as they serve the interests of the advisers rather than the interests of their clients. The conflict of interest created by commissions is primary. Secondary reforms in relation to disclosure, competency and training, will not effectively counteract this foundational conflict of interest. Genuine reform in the area of insurance must ban all forms of conflicted remuneration Comments by the Financial System Inquiry regarding insurance advice The 2014 Financial System Inquiry identified conflicted remuneration in insurance as an important issue to be resolved if public trust and confidence in the financial system is to be restored. Despite recognising the ill effects of commissions in insurance, in large because the Commonwealth Financial Planning scandal erupted during the Inquiry process, the Inquiry took a conservative approach, recommending revisiting a ban on commissions only after another unspecified period of trailing level commission structures. At this stage, the Inquiry does not recommend removing all commissions, as some consumers may not purchase life insurance if the advice involves an upfront fee. However, if level commission structures do not address the issues in life insurance, Government should revisit banning commissions. 17 Five years before the Inquiry, the original Future of Financial Advice (FoFA) legislation excluded a ban on commissions on personal risk on the basis that there were no problems to address in the industry. The Commonwealth Financial Planning scandal made tragically clear the false nature of that assumption. All the evidence suggests that allowing any form of commissions to continue to be used in financial advice will result in poorer quality advice and potentially large consumer losses compared to a scenario in which commissions were prohibited. While care should be taken in transitioning the insurance industry away from 16 Newspoll conducted an independent telephone survey of 1201 Australians, 18 years of age and older, in November-December Data was collected in line with ISO Market, Social and Opinion Research and has been weighted with current ABS population demographics to ensure any extrapolation of results is representative of age, sex and area. 17 Financial System Inquiry, Final Report, November 2014, p 220. ISA Submission to Life Insurance and Advice Working Group 6

8 sales commissions, only a ban on all forms of conflicted remuneration will result in the professionalization of the financial advice industry. 3.2 Underinsurance persists under sales commissions Underinsurance has persisted despite sales commissions being an almost universal feature of the insurance industry since its inception. There is no evidence that sales commissions lead to or are necessary for higher levels of insurance coverage. Behavioural reasons similar to those which lead to the low levels of retirement savings (compounded by low levels of trust in the financial advice industry) appear to be the cause of the level of underinsurance. The public policy solutions to these general behavioural tendencies are public literacy programs, strong consumer protections, robust defaults and affordable advice in the client s best interest. The argument that commissions are necessary to solve the underinsurance problem can only be seen as a self-serving justification to maintain a very profitable remuneration structure. Moreover, the presence of highly profitable commission structures has prevented innovation and competition in the insurance industry that would drive an increase in insurance coverage within the Australian population. By phasing out commissions, alternative and more effective models for distributing insurance products can develop. 3.3 Options for Reform The Life Insurance and Advice Working Group s Interim Report states that a no commission arrangement has not been actively considered in this interim report. 18 We respectfully urge a reconsideration of this position. The Interim Report s acceptance that the status quo must change is welcome. However, dismissing a no commission arrangement as a potential option ultimately prevents proper consideration of the one measure that can deliver long-term effective reform a ban on all conflicted remuneration. ISA supports appropriate transition measures to assist the industry align the interests of advisers and their clients and ultimately professionalise the industry as a whole. The appropriate duration for a transition period under which these measures operate is 5 to 10 years, with the option for different measures to operate for different lengths of time. Measures include: Flat or level commissions. This will effectively grandfather existing trail commissions, and by reducing new upfront commissions to appropriate levels will assist consumers in purchasing appropriate and durable insurance plans and avoid being churned by advisers incentivised by large upfront commissions. Capped commissions which are paid until the cost of advice has been repaid and better reflects the level of advice provided. This will assist the commission structures wind down, while ensuring consumers are receiving greater value for money when purchasing an insurance product. A requirement for financial advisers to provide a strategic justification for advice prior to and separately from a product recommendation. This will assist advisers and advice dealerships move towards providing advice which is separate from product recommendations. An annual shadow shop review of insurance advice conducted by an independent body and funded by the industry. The purpose of an annual review is to track the progress of the industry during the 18 John Trowbridge, Interim Report on Retail Life Insurance Advice, p 24. ISA Submission to Life Insurance and Advice Working Group 7

9 transition period. Given the parlous state of the industry and the significant losses caused by poorly incentivised financial advisers, it is appropriate that the cost of tracking industry progress is funded by the industry rather than the public. ISA Submission to Life Insurance and Advice Working Group 8

10 REFERENCES ASIC (2003) Report 18 Survey on the quality of financial planning advice. ASIC (2006) Report 69 Shadow shopping survey on superannuation advice. ASIC (2012) Future of Financial Advice: Best interests duty and related obligations, December ASIC (2012) Report 279 Shadow shopping study of retirement advice. ASIC (2014) Report 413: Review of retail life insurance advice. Financial System Inquiry (2014) Final Report, November Investment Trends (2013) Advice & Limited Advice Report, September John Trowbridge (2014) Interim Report on Retail Life Insurance Advice, Life Insurance and Advice Working Group, 17 December ISA Submission to Life Insurance and Advice Working Group 9

11 Rice Warner Actuaries (2010) Impact of Banning Commissions on Affordability of Risk Insurance, prepared for Industry Super Australia, December ISA Submission to Life Insurance and Advice Working Group 10