3 March 2016 Michael Nowak Managing Director / Senior Adviser Joe Nowak Financial Services Unit 1, 414 Upper Roma Street Brisbane QLD 4000 Committee Secretariat Senate Standing Committees on Economics PO Box 6100 Parliament House Canberra ACT 2600 economics.sen@aph.gov.au Submission Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 to the Economics Legislation Committee
INTRODUCTION Thank you for the opportunity to make a submission to this Senate Economics Committee. I support the outcome that the LIF Legislation aims to achieve. Financial advisers collectively support measures that will improve the reputation of advice, and also measures that would prevent those that do the wrong thing from doing so. However, the current LIF Legislation proposals require further examination as they currently do not achieve the objective of providing a regulatory framework for more Australians to obtain quality financial advice. This is because this Legislation will drive up the cost of life insurance advice for consumers, and also restrict access to quality non-bank life insurance advice currently provided by thousands of small business advice firms around the country. I make this submission as a 37 year old business owner of a non-bank aligned financial advice business who advises over 700 clients throughout Brisbane and surrounding areas. My business provides specialist advice services to our clients in the areas of life insurance and wealth creation. Our business has over $3.5 million in life insurance premiums under management and we have managed the claims of over $10 billion since 2008 on behalf of our clients and their families. We also provide pro bono claims services for those who need assistance with their superannuation fund claims. I am also the Immediate Past President of the Association of Financial Advisers and spent four years on the AFA National Board. Personally I have been advising for almost 11 years and hold a Bachelor of Economics from QUT, an Advanced Diploma of Financial Services and the FChFP designation from the AFA. I am making this submission as a young adviser and small business owner who plans to have a life-time career in financial advice helping Australians maximise their financial potential and achieve their lifestyle and financial goals. I am very concerned that the proposed LIF legislation will restrict me in being able to perform the vital role I play in helping Australians to achieve their financial goals, especially in the area of protecting their wealth and maintaining their financial independence in event of the unexpected.
CRITICAL ANALYSIS OF THE LIF PROCESS I, and many within the financial advice industry, have major concerns with the process that ASIC and the Government have taken to develop the LIF Legislation. I have question of the validity of the research conducted by ASIC that has resulted in the Government taking this action, and also I believe that the Government needs to more thoroughly engage all of the relevant stakeholders as the current proposed Legislation only benefits the banks and insurance companies. This is at the expense of the other stakeholders including consumers, non-bank advisers and financial advice licensees. My primary concerns with the process are summarised below - 1. CONCERNS OVER ASIC REPORT 413 SAMPLE SIZE The original ASIC 413 was a report that was conducted on 79 advisers of the estimated 18,000 advisers nationally. The use of such a small sample size less than 0.5% begs the question whether Government should be recommending such significant change without adequate appropriate industry wide evidence. 2. ASIC REPORT 413 WAS A TARGETED REPORT The ASIC report concentrated on a small sample of advisers who wrote large amounts of life insurance business but also those who had the highest lapse rates, hence poor results were expected from this report. ASIC chose advisers based on the data requested as above from life insurance companies. This was communicated to me ASIC senior executives whilst I was AFA President. I was extremely surprised and concerned when ASIC then released this report as an industry wide report as it clearly was not. 3. ASIC REPORT 413 GAVE HYBRID COMMISSONS A GOOD REPORT 93% of advice within the ASIC 413 report provided on an alternative commission to upfront commissions provided a good outcome to consumers. These include commissions paid at 80% plus GST which the advice associations and advisers consider the appropriate outcome for upfront commissions (at this level upfront advice and implementation costs are covered for small business). 4. HOW WERE THE GOVERNMENTS DRAFT FSI LIF RECOMMENDATIONS MADE? The Government s Draft FSI LIF recommendation of level commissions was made without any consultation with advice bodies or advisers and does not give any commercial acknowledgement to the fact that upfront quality life insurance advice takes a significant amount of time and resources to implement. The FSI Chair, David Murray (ex CBA CEO) only engaged the banks and ASIC in consultation. 5. THE TROWBRIDGE REPORT MIRRORS THE FSC TROWBRIDGE SUBMISSION It is important to note that the final Trowbridge Report almost totally mirrored the FSC Trowbridge submission (note also that the FSC attempted to keep their Trowbridge submission confidential). The AFA was dissenting of final Trowbridge Report as it did not provide the framework that would allow consumers to obtain more high quality life insurance advice and it recommended that small business advisers operate in an environment whereby they provide initial life insurance advice to clients at a loss! It is fair to say the small business in any industry cannot do operate for any extended periods without going out of business. Conclusion I do not believe that the Government has sufficient data to recommend such radical change that will clearly have negative outcomes for the majority of stakeholders, and not achieve the objective of the legislation.
OUTCOMES FOR STAKEHOLDERS Consumers 1. Consumers will pay more for quality non-bank advice - unfortunately the LIF Legislation will result in consumers paying more for non-conflicted quality life insurance advice as non-bank advisers will be forced to charge upfront fees to supplement the decrease in upfront commissions. 2. Life insurance premiums will not be reduced consumers will not benefit from cheaper life insurance premiums. Life insurance companies including Asteron, BT, AIA and Zurich have all stated publicly that they will not reduce premium rates for consumers despite significant decreases to upfront costs. http://www.professionalplanner.com.au/risk/2015/07/21/no-plans-to-drop-risk- premiums-as-upfront-commissions-decline- 38612/?utm_medium=Email&utm_source=ExactTarget&utm_campaign=PPO714 3. Currently FOS complaints for life insurance advice are minimal. In 2012/13 there were 1,043 and this figure is consistent to previous years. That same year 85,000 life insurance claims were paid 4. Retail advised life insurance pays claims - In 2014 there was $5 billion in retail life insurance claims were paid helping 75,000 Australian families (half were from life insurance advisers). The system is not broken. Why jeopardise this fantastic outcome? The alternative sources for life insurance for consumers are Group life insurance within Super which generally provides insufficient levels of insurance cover, does not include trauma cover, and has become more expensive than retail insurance in recent years, despite being inferior. Direct life insurance which is more expensive than retail insurance, has less benefits than retail insurance, is underwritten at claim time and thus 50% of claims are declined (see below, source TAL, 2013). For these reasons I believe a Government review of Direct Insurance is warranted.
Small business The maximum upfront commission in the LIF Legislation will require non-bank advisers to provide life insurance advice at a level close to cost and potentially at a loss. Initial fees would therefore be required to be charged to clients in order for a profit to be made. Research conducted by Zurich Life in 2015 showed that 57% of consumers would leave the market altogether if required to pay any out of pocket cost for life insurance advice. The remainder were not prepared to pay more than $600 still well short of the true cost of providing that advice. Small business is the backbone of the Australian economy and the LIF legislation is viewed by many as unnecessary, over-regulation without adequate evidence. Does this LIF legislation pass the small business test? Small business advisers develop their value propositions with a focus on strong client relationships and ongoing service, including claims management. This proposition is superior to other channels including the banks who do not proactive review their client s changing needs note the recent CBA / James Kessel case on the importance of reviewing your clients and upgrading a policy if appropriate. Banks Under the current LIF Legislation, banks and insurers will profit from decreased distributions costs (lower upfront commissions) and a competitive advantage will be gained for their salaried distribution forces selling their own products who do not need to charge upfront advice fees. Note also, that in LIF negotiations with Government, the banks inexplicably attempted to exclude their white label insurance products from this LIF legislation. It has been widely publicised with the financial advice industry the banks benefited from a very effective lobby. Banks also have an appalling recent track record in financial advice, i.e. NAB, CBA, Macquarie and ANZ. I would not trust the banks to advise my mother. Would you? Government The LIF legislation will have a significant impact on the Government and little or no investigation into the impacts have been conducted. 1. The Government will ostracise thousands of small businesses 2. Employment in these small business financial services practices will reduce. The current LIF legislation will result in business closures and job losses. 3. Government revenue will decrease from small business tax revenue, lower PAYG caused from job losses, and reduced stamp duty from life insurance sales. 4. Government expenses will increase should public reliance on disability and widow payments increase from levels of insurance. For example, in 2014 $1.4 billion was paid in total income protection claims (48,000 claims). If these people were on the basic Centrelink allowance this would cost the Government $544 million per year. Can the Government afford this?
OTHER POINTS Late last year, life insurance premiums were increased by most life companies by around 10-15%. Premium increases are a major reason why consumes question the affordability of their life insurance, and has been a significant contributor to policy lapses and/or a request to their advisers to review their cover. Does this SEC believe that it will be a better outcome for consumers if advisers are restricted to review their client s insurance and there are restrictions placed on what is currently competitive free life insurance market? In many cases over the last few years, the data used to demonstrate high life insurance lapse rates did not acknowledge or take into consideration that this data was from the GFC years when many Australians lost their jobs or had to tighten their belts and decrease their discretionary spend. Life insurance is a discretionary spend and policies were lapsed not a result of adviser actions but rather client necessity. Using data from this GFC period to advocate for changes to adviser legislation due to high lapses should be done with caution. Currently, minimum financial adviser educational requirements are being reviewed and are expected to rise. This has broad industry support and will certainly improve adviser competence and have a positive impact on client outcomes. FoFA legislation passed in 2015 strengthened the Best Interest Duty by legal binding advisers to act in the best interests of clients (previously advisers were required to demonstrate that they know their client). ASIC now has greater powers and many argue that this alone is sufficient to make
significant improvement to life insurance advice outcomes as those doing the wrong thing can be dealt with by the regulator. It also avoids penalising the many advisers that are currently operating correctly. IMPORTANT STEPS Define life insurance lapse and ensure life insurance companies are reporting lapses correctly. Lapses can result from a number of reasons, many which are client initiated. The ASIC report 413 provides some examples of what should not constitute a lapse on page 29. I believe this should also include a decrease to the sum insured which some companies do define as a lapse. Our business provides ongoing service and advice to our clients and we often amend policies when required for our clients. Also note, ASIC is always able to review an adviser should it be reported that they have high lapse rates. Understand what churn really is. Churn is widely acknowledged as the replacement of a life insurance policy which is to the detriment of the client. Every year, advisers are required to replace their client s insurance policies within their client s best interest. Factors outside of the advisers and client s control contribute to this ongoing review of policies such as rising life insurance premiums caused by market factors, improving policy definitions that are not passed back to existing policy holders, or changing client circumstances. ASIC acknowledges that changing client s insurance policies that is made in their best interest is not churn. Conduct adequate research and justification for change that will deliver the desired policy objective, such as a Government Regulatory Impact Statement. Consider other options to review policy replacement. For example, there could be a requirement that a licensee review the Statement of Advice (SOA) when a policy is being replaced.
CONCLUSION Whilst I agree that the LIF is necessary to prevent poor consumer outcomes, and improve the reputation of financial advice, the current proposal only penalises small business advisers in a way that will restrict consumers from obtaining quality life insurance advice. The LIF proposal only address remuneration for these advisers delivered in the form of a blunt instrument and do not pay adequate consideration to recent changes to the Best Interest Duty and upcoming minimum education standards, nor has it recommended that the life insurers play any significant role. Both sides of Government claim to champion small business in Australia. In this case, small business is being severely impeded from providing a necessary service to Australians. Before such radical change is made, it is essential that this committee request a regulatory impact statement or review the impact via a small business effects test. ATTACHMENTS Risk Info Retail claims statistics 2013 Risk Info Retail claims statistics 2014 FOS 2012/13 Annual Review (refer pages 75,76 for life insurance section)