Levy wants advisers to seek client's permission to receive life commissions

Michelle Levy has published a snapshot of the data the Quality of Advice Review (QAR) has considered on general insurance and life insurance, and a set of proposals.

Currently, the Corporations Act provides an exemption to the ban on conflicted remuneration for life risk insurance products (other than group life policies in superannuation or policies issued in respect of default superannuation members), which allows commissions to be paid for the sale of life risk insurance products.

As such, Ms Levy said that having considered qualitative and quantitative data from a range of sources, she identified a number of benefits that would otherwise be conflicted remuneration, because they are reasonably likely to influence the financial product advice given to a retail client, but which are not prohibited.

“The terms of reference for the review requires me to consider whether these benefits should continue to be able to be given. I have been persuaded that there are some benefits and some circumstances in which benefits which are reasonably likely to influence financial product advice should be retained, or [retained but] subject to an additional requirement that the client provides their consent to the benefit,” Ms Levy said.

“Where the benefits relate to general insurance and life risk insurance products, financial advisers and insurance brokers continue to play an important role in giving consumers access to financial product advice about what can and should be valuable financial products.

“In forming this view, I acknowledge that these benefits create a conflict for the adviser (or other recipient) and that this conflict creates a real risk that the quality of the advice provided by the adviser is not as good as it would be, if they were paid a fee by the client for their advice,” the QAR reviewer continued.

While noting that this risk is diminished by several recent changes to the law — anti-hawking, deferred sales of add-on insurance, design and distribution obligations, and the caps on commissions payable in respect of consumer credit insurance and life risk insurance products — she said, “the risk should be further diminished by the proposals outlined in the proposals paper”.

These proposals include retaining the existing exemption for benefits given in relation to life risk insurance products but requiring financial advisers (relevant providers) who provide personal advice to retail clients in relation to life risk insurance products to obtain their client’s informed consent, in writing, to receive a commission in connection with the issue of a life risk insurance product.

Moreover, Ms Levy said that for the consumer to be able to make an informed decision, “the adviser must” disclose details of the commission they will receive for the duration of the policy (e.g. any upfront and trailing benefits); and the nature of the ongoing service that the adviser will provide to the client in relation to the life risk insurance product (e.g. assisting the client to pursue and settle claims).

“A financial adviser is an intermediary who has undertaken to provide advice in the best interests of their client. If an adviser will receive a benefit for the sale of a life risk insurance product they recommend to their client, they should have an obligation to tell the client about the benefit and the client should have the opportunity to consent (or not) to the provision of that benefit,” Ms Levy said.

“Again, I acknowledge that disclosure and consent are not always (and perhaps not even often) effective consumer protection tools. Nevertheless, a client should be put in a position to understand and consent (should they choose) to their adviser receiving a benefit from the product issuer.”

According to Ms Levy, her proposals should limit the opportunity for insurance products to be distributed using general advice, while also imposing an obligation for a person who gives personal advice to give ‘good’ advice.