The banking royal commission’s final report has called for grandfathered commissions to be repealed as soon as possible and for the life risk insurance commissions cap to be ultimately reduced to zero.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry’s final report referenced its interim report on grandfathered commissions, which posed the question: “If the premise for the conflicted remuneration provisions is accepted (and no‑one suggested that it should not be) how can the grandfathering provisions be justified today?”
“In my view, the answer to that question is now clear: they cannot,” commissioner Kenneth Hayne said in the final report.
Hayne said when grandfathered arrangements were first introduced the industry might have said the sudden change in remuneration arrangements could result in “untoward consequences for countervailing benefits that would not outweigh the harms of disruption”.
“Even if the arguments relied on to justify the grandfathering exception were valid when that exception was introduced, it is now clear that they have outlived their validity,” he said.
On life risk insurance commissions, he said few submissions in response to the interim report showed support for making further changes to the exception for life risk insurance products, with many submissions arguing the arrangements that took effect on 1 January 2018 under the Life Insurance Framework (LIF) reflect a compromise between the risk of underinsurance and the risk of adverse client outcomes arising from conflicts of interest.
“I doubt that a complete ban on conflicted remuneration in respect of life insurance products would lead to significant underinsurance. At the time of writing, the overwhelming majority of life insurance policies in Australia are held through superannuation funds,” he said in the report in response to these concerns.
As at August 2017, more than 70 per cent of Australian life insurance policies were held in super funds.
“While it may not follow that every Australian who holds a life insurance policy through a superannuation fund has the same level of cover that he or she would be advised was appropriate on consulting a financial adviser, I am not convinced that a move away from commissions for life insurance products would see large numbers of Australians without an appropriate level of life insurance,” Hayne said.
He urged the Australian Securities and Investments Commission (ASIC) to conduct its post-implementation review of LIF in 2021 as quickly as possible, adding if the review indicates the cap on commissions has not contributed or significantly contributed to underinsurance, then ASIC should continue reducing the cap, ultimately to zero.
“Unless the reduction in life insurance commissions can be shown to contribute significantly to underinsurance, I can see no justification for allowing this form of conflicted remuneration to continue to be paid,” he said.
Elsewhere in the report, Hayne recommended that the law to be amended in a way it would require advisers to disclose their lack of independence.
He suggested the law be amended to require a financial adviser, who would contravene section 923A of the Corporations Act by using or assuming any of the restricted words or expressions identified in section 923A(5), including independent, impartial and unbiased, must “before providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased”.