Not ideal, but the LIF works

ANALYSIS

Many life/risk advisers would have been irked by last week’s declaration by the Financial Services Council (FSC) that the Life Insurance Framework (LIF) had been successful and that the current commission settings should be retained.

It is now close to a decade since the then Labor Minister for Financial Services, Bill Shorten set the wheels in motion for the events which resulted in the creation of the LIF and in the same decade the number of specialist life/risk advisers is estimated to have more than halved.

Importantly, in that same time, the profitability of the major life insurance companies has become problematic and Australia’s life insurance gap has certainly not closed.

To be fair, the halving of lfie/risk adviser numbers is as much owed to factors such as the Financial Adviser Standards and Ethics Authority (FASEA) regime as the impact of the LIF, and the profitability of the major life insurance companies has in large measure been undermined by their approach to disability income insurance.

So, is the FSC right? Has the LIF “improved consumer outcomes by reducing the misaligned incentives”?

Well, to understand the premise is of “misaligned incentives” one has first to understand and accept the existence of “policy churn” – something which the Australian Securities and Investments Commission (ASIC) claimed to be exceedingly problematic a decade ago but for which it provided little substantive data.

The churn which did exist was generated by the ability of advisers to switch/churn their clients into new policies to obtain the significant upfront commissions made available by the life insurance companies – something which was addressed by reducing the level of upfront commissions and introducing clawback provisions if advisers did recommend a switch.

The success or otherwise of the LIF was to be reviewed by ASIC this year, but the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume pleased many advisers by ensuring it became part of Treasury’s Quality of Advice Review.

Life/risk advisers were pleased by the minister’s decision because they had little trust in ASIC’s ability to be objective given their belief that its original Report 413 given that it dealt with files from just seven licensees.

But, with or without ASIC, the status of that review became problematic as a result of the Royal Commission’s recommendation 2.5 dealing with Life Risk insurance commissions.

The Royal Commission recommendation was as follows: “When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero”.

Notwithstanding the fact that the review of the LIF has been removed from ASIC and included in the Quality of Advice Review, that review will nonetheless be using ASIC data and analysis to come to its conclusions.

It is to be hoped that those running the review therefore accept submissions from the industry and data wider than that accumulated by ASIC.

The financial advice sector is very different to the one which existed in 2012 and, like it or not, financial advisers will probably agree that the LIF has been working as intended.