LIF – THE INCONVIENIENT FACTS.
EXECUTIVE SUMMARY
The Advice Profession has endured a ponderous 18 year political and bureaucratic overreach by all sides of politics that badly needs to be resolved in the near future for the benefit of Consumers, the sustainability of the Profession and the nations parlous underinsurance position.
This 18 year saga commenced in 1997 when the Ripoll Enquiry later evolved into the 2013 FOFA reforms which was then perpetuated by the 10 – year Frydenberg/O’Dwyer influenced Coalition Government reign. Unfortunately for the future financial health of the nation and Consumers, the out going Minister failed to address the ramifications over the past 3 years.
With a new incoming Financial Services Minister probably wondering whether they have been given a poisoned chalice or not, it is time to comprehensively address the core issues with one of the most critical legislative failures in modern times – the LIFE INSURANCE FRAMEWORK [LIF] Legislation.
LIF must be the most vicious and industry targeted destructive legislative event in living memory. Ironically and sadly however, it is also one of the most effective and successful pieces of legislation once its backer’s objectives are analysed and assessed. The greatest LIF losers are Consumers/tax payers, the very group all stakeholders should be protecting.
We believe LIF was not an ill conceived concept with unfortunate unintended consequences, it was specifically designed and engineered to decimate the Financial Advice Profession and in particular the Risk Adviser fraternity.
As with all financial services legislation over the past two decades, the Financial Services Council [FSC] is in there protecting and promoting the best interests of their Financial Institutional members [which they should be doing] but as always, the Advice Profession is led to the proverbial slaughter house.
If you need reminding of the past events please go to the FSC website where the REVIEW OF RETAIL LIFE INSURANCE ADVICE report by John Trowbridge as Chair of the LIFE INSURANCE ADVICE WORKING GROUP [LIAWG] is displayed on a ‘Trophy Wall’ of past FSC achievements. This paper was funded by the FSC and AFA, later backed by the FPA and morphed into the LIF legislative catastrophe via Minister O’Dywer with the assistance of 5 major Life Insurance Companies.
It has been and still is a disastrous outcome for all stakeholders which needs immediate attention from the new Minister.
THE DUPLICITOUS and other PLAYERS
During 2013, the emergence of Robo Advice, Artificial Intelligence, direct online marketing and telemarketing were looming large over the future direction of financial advice. Many Financial Institutions were convinced the future of human delivered advice to consumers was clouded at best and subsequently put in place strategies to remove Financial Advisers from the consumer relationship. This deliberate culling procedure was so ruthless and heartless that 30 suicides were reported.
Coincidentally [maybe], the emergence of a senior Liberal Party politician’s ambitions to be one day Prime Minister was a major factor in the development of not only LIF but FASEA, unnecessary compliance and the ban on Grandfathered Revenue. This person needed Financial Institutional backing to achieve the political objective, therefore pleasing the Financial Institutions via the FSC was paramount.
It should be noted that the Liberal Party has acknowledged they got it wrong with our Profession in the past and are prepared to support appropriate amendments.
We cannot say whether the Institutional strategy was directly linked to the Politician’s agenda but the overall objective to frustrate, intimidate and starve Advisers out of the Advice profession was comprehensively achieved. With over 30,000 Advisers pre 2015, the real Adviser number is around 11,200 with 500 Risk only Advisers still operating. With millions of baby boomers retiring over the next 5 years and the nations underinsurance liability over $2.5 trillion, something urgently needs to be done.
Like any festering sore, LIF needs to be lanced to remove the poison and be allowed to heel. We will not be pulling any punches with who are the architects and what their objectives were and are. It is time for the new MINISTER to be informed of who and why this legislation was created, the dramatic negative affects it has had on all stakeholders and what needs to be done to revive the Life Insurance industry to reduce the nations dangerously over bloated underinsurance position and most important of all, lower premium costs for Consumers.
Furthermore, it did not matter at the time that both the UK and New Zealand industries tried similar commission elimination experiments 10 years earlier but failed dismally or that Consumers prefer to pay for risk advice via commission – it was all about the FSC end game of culling Advisers. Commission levels are now back to 240% and 180% respectively in UK/NZ in a thriving environment. In Australia the level is 60% and prohibitive compliance costs make it difficult for Consumers to accept the terms, this also makes it uneconomic for Advisers to offer risk solutions to clients – hence the 50% reduction in new policy capital inflows and the corresponding 50% increase in premiums for existing and new policy holders.
The left wing consumer groups and their supporters must understand that Consumers need to be coerced into buying risk products and most consumers prefer to pay by commission anyway. As long as the commission cap stays in place, the elimination of conflicts is preserved. Ironically it was Minister Shorten in 2012 who recognised the difference between Risk Advice and Financial Advice by carving out Risk products from the FOFA ban on commission payments.
Obviously this carve out did not suit the political agenda of the FSC and their co – conspirator’s….the outcome is now part of an unfortunate history.
For the record, the AIOFP was approached in 2014 to join the FPA/AFA/FSC Association triage to support then Minister O’Dwyer’s objective of having no industry opposition to LIF’s passage through both Houses of Parliament. We immediately rejected the offer after an earlier consultation process with our members and the broad experience of our Adviser background Directors, the wise heads in the industry warned and predicted exactly what would and did happen.
We were also assured the Life Offices of Suncorp [now Resolution Life], TAL, MLC, AIA and Zurich formed a consortium [the Consortium] who were backing LIF and the Ministers wishes. This strategy was also supported by the FSC, FPA and AFA, see attached press release from the Minister, most of these players are involved in the abovementioned Trowbridge Report.
RAMIFICATIONS TODAY.
The ongoing deterioration of the Nations underinsurance position will continue unless Government intervenes and a bipartisan position is found to counteract the influence of the left wing consumer groups. We also need a commercially pragmatic approach from ASIC, it is very clear from the last decade of LIF influence that the ‘experiment’ has comprehensively failed.
The Consortium agenda may just explain why CALI has been ineffectual in Canberra over the past 3 years, the 7 person CALI Board is dominated by 5 Consortium member Directors who all have large back books of policies to sustain their business model funding requirements going forward. It seems they are quite content with the current dire circumstances to eliminate competition with Integrity Life the latest victim. The Life Offices with small back books need new retail policy’s to fund their operations and the general health of the entire industry.
The selfish and uncaring attitude of this Consortium towards the Risk Advisers, Consumers and the industry in general is utterly reprehensible, they do not deserve Adviser loyalty and should be sanctioned by Government.
Considering the CSLR and ASIC imposed levies are being used to pay for industry damage caused by related parties, these Consortium players should be paying compensation for the industry and consumer calamities they have directly caused with their anti – competitive behaviour and influence.
The cutting of commission by 50% and imposing unnecessary compliance demands on Risk Advisers has led to Consumer premiums rising by ironically 50% and the subsequent widespread cancellation of existing policies. Consumers are the greatest losers in this unprecedented disaster, closely followed by diminished Government stamp duty revenue, Life Office job losses and the cost of welfare payments to uninsured consumers is escalating.
QAR self described ‘lefty’ author Michelle Levy supports the existence of a commission model in her QAR recommendations but the industry has struggled under the current 60% upfront level. This needs to be moved up to at least 80% capped and with the expected current SOA content requirement moving in favour of Advisers using professional judgment, these amendments will immediately transform the market for all stakeholders.
We support Consumers receiving a commission AND a fee for service based option proposal to select from when assessing an offer from an Adviser, let Consumers make the decision on what suits them, not Canberra Bureaucrats.
Like the CSLR Legislation where the Advice Profession agreed with the Hayne and Ramsay recommendations, the final legislation content is negotiated behind closed doors in Canberra on the eve of the Chamber vote which is where the FSC excels in achieving outcomes for their Institutional members – unfortunately the Advice Profession needs will always be secondary to those major Institutional funders of the FSC.
This is not rocket science, Advisers should not be giving the FSC their political and monetary capital to use against them in Canberra. CSLR is a classic example, history has clearly demonstrated that the Advice Profession cannot afford to have the FSC representing their interests in Canberra, it is time for greater collaboration by the genuine Advice Association players to represent the Profession in Canberra.
Our final request to the new Minister is please realise that Financial Advisers want the best outcome for their clients in all respects or they will lose them and not have a business. Experienced Advisers from the coal face of Advice need to be seriously consulted by Government on what is best outcome for consumers and the Profession – the old way of Canberra’s starting position of negativity towards our Profession is no longer appropriate.
This paper has been sent to industry stakeholders including all Politicians for consideration.
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Life insurance commission reductions to benefit consumers
High upfront life insurance commissions will be reduced with the passage of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 in the House of Representatives, the Minister for Revenue and Financial Services, the Hon. Kelly O’Dwyer MP, said today.
“High upfront commissions have been identified as a significant cause of poor-quality life insurance advice. The measures in the Bill will reduce these high upfront commissions and better align the interests of financial advisors and their clients,” Minister O’Dwyer said.
The Government thanks the Association of Financial Advisers, the Financial Planning Association of Australia and the Financial Services Council for their agreement in developing this important package of reforms.
Read the complete statement here.
The Hon Kelly O’Dwyer
Minister for Revenue & Financial Services
