Levy’s life insurance recommendations explained: What is required for consent?

Among the 22 recommendations handed down by the lead of the Quality of Advice Review (QAR) Michelle Levy, one concerns the provision of life insurance.

Under this recommendation, Ms Levy has advised the government to retain the exception to the ban on conflicted remuneration for benefits given in connection with the issue or sale of a life risk insurance product.

“Commission and clawback rates should be maintained at the current levels”, Ms Levy said. Current levels are 60 per cent for upfront commissions and 20 per cent for trailing commissions, with a two-year clawback.

Expounding on this recommendation, Ms Levy said she has formed the view that there is a “real risk” that fewer people would get life insurance advice if commissions were banned.

“Nothing we have seen suggests that life insurance advice is of a poorer quality than advice on other topics and nothing we have seen suggests that financial advisers are recommending life insurance in circumstances where the client will not benefit from holding life insurance,” Ms Levy said.

“The LIF [Life Insurance Framework] reforms also mean all life insurers pay the same rate of commission and so there is less incentive for an adviser to recommend a policy issued by one insurer over another. This is helpful,” she noted.

Answering calls for an increase in commission, Ms Levy opined that this would increase the cost to the life company and therefore would have the effect of increasing premiums.

“I do not think it would be desirable for commissions to increase,” she said.

However, Ms Levy clarified that while she has not recommended that life insurance commissions be banned, “I do think it is preferable for consumers to pay a fee for advice about life insurance like they must for other financial products”.

“The recommendations I have made in this report will make it easier and less costly for advisers to provide advice and I hope encourages greater innovation and creativity in the way advice is provided to customers and clients,” Ms Levy said.

“It will also help life companies to provide personal advice to their customers about life insurance,” she continued.

In this context, she encouraged advisers to think more about how they can encourage their clients to pay a fee for advice about life insurance, just as they do for advice about superannuation and other investments.

Condition on LIF commissions

While the QAR has recommended retaining the current LIF levels for commission and clawbacks, this recommendation comes with one condition.

“The condition to this is that the provider of personal advice to a retail client about a life risk insurance product must explain to their client that they will be paid a commission if the client decides to buy the product recommended by the adviser and they must ask for the client’s consent to accept the commission,” Ms Levy said.

She clarified that if the client does not consent, then the adviser can agree to provide the advice for a fee paid by the client, or they can decline to give the advice.

Noting that consent in all circumstances is desirable, including when advice is provided by an insurer intermediary as opposed to a consumer intermediary, Ms Levy said: “The prospect of receiving a commission creates a conflict for the adviser and under the general law they must have the client’s consent before they can accept the commission”.

What is required for consent?

Ms Levy underlined that consent is not intended to be an onerous obligation. Instead, she said, it is intended to foster an open conversation between the adviser and their client.

“I do not recommend any form of prescription for the consent beyond that it be informed and recorded. I certainly do not require consent to require the creation of a new form, in the manner of consent requirements for ongoing fee arrangements,” she said.

“To be genuine and provide a real opportunity for the consumer to make an informed decision, the consent must be obtained before the life insurance product is issued”.

However, whether the consent is sought before or after the life insurance advice is provided is up to the adviser.

In order for consent to be informed, Ms Levy dictated that the adviser must provide the client with a clear explanation that they will be paid 60 per cent of the first year’s premium and 20 per cent of the premium in each following year for the life of the policy.

“In that case, they will not need to obtain any further consent when the trail commission is paid,” she said, adding that the consent is not required to specify the dollar amount of the commission.

Consent is also not required if the AFS licensee, or a representative, transfers the responsibility for managing a client’s life insurance product as part of the sale of part or all of the advice business.

“In this case, the new adviser would need to retain a record of the consent, but is not required to obtain the client’s further consent,” Ms Levy said.

Ms Levy also clarified that while there might be a formal written agreement between the adviser and client which would record how the adviser will be paid, the discussion and consent might also be recorded in an email from the adviser to the client confirming all the details.

Touching also on the argument that some ongoing relationships justify an ongoing commission, Ms Levy stressed that a commission is a fee paid by the life company for the sale of the life insurance and not a fee for services provided to the client.

“This means that if the services are promised but not provided, the client may be able to bring a complaint against the adviser, but the life company will not have any obligation to turn off the commission or claim any part of it back from the adviser,” she concluded.