Consumer trust isn’t something to be taken for granted, but reports from the UK, US and here at home are all pointing towards an uplift in trust levels around financial advice, which can only be a welcome development.
There are significant tailwinds behind the financial advice industry at the moment, but some major obstacles are still preventing advice practices from taking advantage of surging demand according to a new study from CFS.
Risk commissions to stay, with consent rule caveat: Levy
Quality of Advice Review leader Michelle Levy has voted to retain life insurance commissions at their current level, with the condition that clients should sign a consent document acknowledging and accepting the transfer of conflicted remuneration to their adviser.
After reducing commissions to 60 per cent upfront and 20 per cent trail in 2017, the Hayne Royal Commission asked if they should be scrapped altogether in favour of upfront consumer fees – a question which fell to Levy when the liberal government wedged a scheduled insurance review into the broader advice review.
Levy put forward that while insurance commissions are “reasonably likely” to influence advice, they should be retained “subject to an additional requirement that the client provides their consent to the benefit”.
“In forming this view I acknowledge that these benefits create a conflict for the adviser,” she added, “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.”
Yet that risk is diminished, she stated, by separate reforms in the review’s proposal paper that limit the opportunity for insurance products to be distributed using general advice, as well as the general exhortation for all advisers to provide objectively ‘good’ advice.
Levy’s support for retaining commissions also stemmed from data gathered over 4 years (2017-2022) as part of the LIF review, which showed an increase in best-interest duty compliance (from 37 per cent to 58 per cent), a reduction in potential client harm (from 12 per cent to 7 per cent) and less indications of policy churn.
A lot of the work to fix latent issues in insurance advice has already been done, Levy intimated, not only by reducing commissions in the LIF reforms but by the education and ethics standards introduced for all advisers in recent years.
The broader advice reform suite – which includes abandoning SOAs and consolidating fee notification documentation – could also reduce the cost to serve and encourage more advisers to charge advice fees voluntarily rather than rely on commissions, Levy added.
According to Simon Swanson, managing director at life insurance provider Clearview, the proposal to retain commissions “recognises the important role of commissions in solving the advice affordability and accessibility puzzle”.
“Consumers should be able to choose how they pay for life insurance advice, be that a fee, commission or a combination of both,” Swanson says.
MLC Life’s head of retail insurance agreed, stating that consumers should have a choice as to how they pay for advice, lest it becomes “the domain of the few who can afford it”.
Consumer group CHOICE has been a vocal critic of commissions, however, saying the practice leads to “poor consumer outcomes, with consumers being sold into general insurance that is inappropriate to their needs”.
The condition of disclosure
Levy’s condition for supporting commissions is that the conflicted remuneration should be disclosed so that consumers can make an informed decision.
Advisers, she proposed, should disclose both the commission they will receive (both upfront and trailing), as well the nature of the ongoing service.
Currently advisers are required to disclose the commission they receive; the requirement to seek explicit consent would be new.
The requirement is somewhat incongruous with the general theme of the review’s proposals (such as getting rid of SOAs), which aims to consolidate undue documentation and minimise disclosure measures in favour of bringing costs down. The review leader made the point, however, that conflicted remuneration deserves explicit disclosure.
“I acknowledge that disclosure and consent are not always (and perhaps not even often) effective consumer protection tools,” she stated. “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.”
Clearview’s Swanson said while the proposed reforms are “sensible” on the whole, client consent requirements for insurance advice commissions need to be treated carefully.
“The practical application of this additional requirement, and any potential implications, need to be carefully thought through,” he says.
The Levy review is scheduled to hand its final recommendations to government on December 16.
