Getting to Grips with Trowbridge

In this feature, riskinfo Senior Journalist, Emily Saint-Smith, takes a magnifying glass to the Trowbridge Review of Retail Life Insurance Advice. Emily considers all the recommendations, not just the adviser remuneration proposals, and reports commentary from across the sector, as well as from John Trowbridge himself…


In October 2014, the Australian Securities and Investments Commission (ASIC) released ‘Report 413 – Review of Retail Life Insurance Advice’. The report found what it called ‘an unacceptable level of failure’ by advisers to comply with the laws relating to appropriate advice. ASIC issued a call to action to the insurance industry, saying it needed to improve the quality of insurance advice, and ensure that the interests of consumers were given priority.

In response, the Association of Financial Advisers (AFA) and Financial Services Council (FSC) initiated the Life Insurance Advice Working Group. The group’s aim was to: ‘…review ASIC’s report and make recommendations on how the industry can respond to the issues identified to ensure that Australians are adequately insured and receive world class financial advice’.

The group comprised six representatives from across the sector:

  • John Brogden (followed by Sally Loane), FSC CEO
  • Andrew Hagger, Group Executive NAB Wealth and CEO of MLC and FSC Board Director
  • Geoff Summerhayes, CEO of Suncorp Life and FSC Board Director
  • Brad Fox, AFA CEO
  • John de Zwart, CEO of Centrepoint Alliance
  • Jeff Thurecht, AFA NSW State Director and a practicing financial adviser

The other primary financial advice association, the Financial Planning Association (FPA) declined to be involved in the process. The FPA did, however, address the issue of life insurance advice reforms in its submission to the Financial System Inquiry.

The LIAWG was chaired by John Trowbridge, who authored an Interim Report (released in December 2014), based on his discussions with the LIAWG and other industry stakeholders.

Over 130 submissions were received in response to the Interim Report. Mr Trowbridge alone was the recipient of the submissions, which were kept confidential from the rest of the LIAWG. Mr Trowbridge defended the controversial decision to withhold the submissions, saying the confidential element of the process was “a really powerful feature” of the review.

“People who made submissions did so in the confidence that they weren’t going to go anywhere else. There was information, opinions and ideas given that people would not have put on paper had they known the whole world may see it,” Mr Trowbridge said.

“The majority of them [submissions] were well researched,” he added. “They included a lot of information that I was able to use. For example, how much does it cost to deliver financial advice? There were up to a dozen submissions that explained in some detail what the job is, how long it takes, who does the work and how much they think that costs.”

Mr Trowbridge released his final report on 26 March 2015. An analysis of his recommendations follows, together with the response of the industry to date…

Adviser remuneration

Removal of upfront commissions

The Trowbridge Report recommends that the life insurance industry move to a level commission model, limited to a maximum of 20% of premiums. The proposed rate of 20% is lower than current level rates available in the Australian market; the current average level commission rate is 30%.

A hybrid commission model was ruled out in the Trowbridge Report because ‘…the model does not adequately address the primary problem of misaligned incentives, at least for clients with premiums exceeding say $2,000 to $3,000’.

if there was no initial payment to advisers beyond renewal commission there would be a substantial mismatch between initial advice costs and initial adviser revenue

The misaligned incentives Mr Trowbridge seeks to address with his recommendations were drawn from the ASIC Report 413. He said the ASIC report demonstrated that ‘…upfront commissions, whether at full upfront or hybrid level, can create a conflict of interest for advisers to inappropriately place a consumer into a life insurance policy or replace a consumer’s life insurance policy’.

The decision to focus so closely on the ASIC Report findings has been met with criticism from some parts of the industry, who have argued that the ASIC Report was flawed and not an appropriate representation of the risk advice sector.

Independent, risk-focused licensee, Synchron, said while the ASIC Report may be statistically correct, the methodology utilised to arrive at the ‘fail’ rate had unrealistic objectives:

‘20 Synchron advisers and 40 files were reviewed,’ the licensee said in a statement issued in response to the Trowbridge recommendations. ‘Four of our advisers and seven files were found to ‘fail’ or be deficient, however only two advisers had more than one deficient file.

‘One of those advisers had three deficient files and the other one had two. The adviser with three deficient files has had his Synchron authority revoked. ASIC also reviewed fifteen files of two advisers whose authorities we had terminated six months before the files were provided to ASIC and for whom there were four failed files.

‘The other adviser, with two deficient files, was found to be deficient due to his clients being unwilling to provide personal financial information. This particular adviser works in an ethnic community that is reluctant to share information and where clients typically have large families and nominate the amount of cover that they require. He has since left Synchron.

‘The two advisers who had only one ‘failed’ file did not give bad advice; rather they omitted information from the SoA or client file.’

Initial Advice Payment (IAP)

To supplement advisers’ incomes, Mr Trowbridge also recommended the introduction of an initial advice payment (IAP), paid by the insurer to the adviser on a per client basis.

Mr Trowbridge said there were genuine reasons why commissions in insurance should be made available but that these arguments do not apply to other monetary and non-monetary benefits received by licensees from insurers

He explained that the IAP will be capped at $1,200 because it is intended to provide advisers with a contribution towards the implementation costs associated with risk advice. When combined with a 20% commission, the figure deliberately falls short of the estimated cost to implement, between $1,500 and $3,000, because it is aimed at ‘…delivering a balance between acknowledging the initial costs of advisers and eliminating any behavioural doubt as to whether the client’s interests are being placed ahead of the adviser’s own interests’.

“If there is no front end payment you clearly run into a big problem with the survival of advisers. They need to change their business models and adapt, but a higher payment upfront runs into misaligned incentives. There’s got to be a movement here. A dollar amount payment is a cost recovery payment, and it’s up to the advisers to figure out, with their licensees, how to make that work viably,” Mr Trowbridge explained.

He added that if there was no initial payment to advisers beyond renewal commission there would be a substantial mismatch between initial advice costs and initial adviser revenue.

In a conversation with riskinfo, Mr Trowbridge was asked whether he could advise the extent to which cashflow modelling had been taken into account in the formulation of his remuneration recommendation.

He said modelling had been projected by a number of life insurers during the LIAWG consultation phase. This modelling considered the likely fall in revenue for an adviser currently operating on an upfront commission basis, who shifted his/her model to a hybrid structure. He said these projections indicated there would be an initial reduction in revenue of approximately 20% to 25% in the first year; this loss being ameliorated in succeeding years, due to the increased level of ongoing commission the adviser would receive under a hybrid model.

Mr Trowbridge also pointed out the modelling that had been undertaken by the life companies was conducted by them in isolation of what his final remuneration model would comprise, or how it would be structured.

The ‘five year rule’

The Trowbridge Report did not recommend an extension of existing clawback periods. However, the IAP comes with a ‘five year rule’. This rule is expected to operate as follows:

For as long as a person is classified as an advised policyholder, the adviser is ineligible to receive another IAP within five years of the last such payment. If, however, there are premium increases or additional policies, the adviser may receive commission payments of up to 20% on the additional premiums.

Mr Trowbridge said the five year rule is intended to remove any financial incentive to replace business, and should contribute to lower insurance costs because of expected improvements in lapse rates.

Chris Wrightson, founder of advice business brokerage Centurion Market Makers, made the following observation:

“It appears that the five year rule has been proposed because of a concern about ‘churn’, or what is perceived as ‘churn’. But it doesn’t address what is currently going on in the insurance, which is that many of the life offices, through their underwriting policies, have delivered ratings, and therefore premiums, that have left them slightly out of pocket. We’re going through a phase now where we’re seeing quite a significant increase in premiums, at different times from different insurers, based on their underwriting and actuarial decisions.

“It means that, within a short period of time, a client’s premiums can move so significantly that there is no choice but for the adviser to move that client’s policy to another, more affordable provider. That repricing is occurring a lot more frequently than every five years.

“What this recommendation is saying, conceptually, is that a client only needs to be re-underwritten every five years. Therefore, the industry will only provide additional funding to the adviser to do that review work every five years. Or, if the client is re-underwritten within this timeframe, the work can be covered by the 20% ongoing commission. It implies that the life offices need to manage premium changes and definition upgrades to this five year cycle as well, but the commercial reality is that this will not happen.”

Phased implementation

Mr Trowbridge acknowledged it would be difficult for the insurance industry, in particular advisers, to move immediately to a level commission model, and therefore proposed a three year transition period.

Phase one, which is recommended to commence ‘as soon as possible’ is for insurers and licensees to implement the five year rule on a ‘best endeavours basis’.

Phase two of the transition, ‘to begin at a suitable date in 2016’, would be for the industry to replace upfront commissions with hybrid commissions, for a period of two years. At the end of the two year period, all insurance policies would be subject to level commissions, supplemented by an initial advice payment (refer below).

Mr Trowbridge noted that while adviser cashflow would reduce during the transition period, there should be no ‘value loss’ to the business due to the increasing level of annual renewal commissions.

Advertised vs actual rate of commission

The other factor to be considered in the commission debate is the way the end commission payment is calculated. This is because the ‘advertised’ rate of commission paid by insurers (usually contained within the PDS or adviser guide) does not necessarily represent the rate that is eventually paid to advisers. For example, advisers have noted that most companies include GST within their commission rate. So an 80% initial commission actually falls by 10%.

Further, depending on the life insurer, the premium upon which the commission is calculated is reduced by:

  • The policy fee
  • Stamp duty
  • Modal/Frequency loading

Taking these factors into account, a hybrid commission rate as a percentage of the premium that is disclosed to the client is more like 60%. This does also not take into account any payments taken out by the adviser’s dealer group/licensee before they pass on the commission.

According to Russell Cain, CEO of comparison website, this further strengthens the argument that a 20% level commission model is simply not sustainable for risk specialist advisers, because the actual percentage paid is closer to 15%.

SoAs suffer from issues relating to length, complexity, and a desire to meet the compliance requirements set out by the licensee

“Currently we are receiving 87% of the annual premium as a commission and not the 110% that has been publicly stated,” Mr Cain explained.

“When we look at one of Australia’s largest insurers, the reality is, for an annual premium of $1,400 we would receive $1,224.30 in commission, $315.70 less than the $1,540 that many believe we receive. The amount we get paid would be even less if it was for an income protection policy.

“It is a challenge to be sustainable in the current remuneration environment, let alone if some of the changes in the report are implemented.”

Licensee measures

Conflicted remuneration

Under the current Future of Financial Advice (FoFA) legislation, life insurance is exempt from the conflicted remuneration arrangements; an exemption which also extends to licensee payments and benefits. The Trowbridge Report recommended that the ban on conflicted remuneration arrangements that apply to licensees in respect of investment products be extended to include life insurance products.

Mr Trowbridge said there were genuine reasons why commissions in insurance should be made available but that these arguments do not apply to other monetary and non-monetary benefits received by licensees from insurers.

However, in recognition of the services provided by licensees and their role in insurance advice delivery, the Trowbridge Report recommended a Licensee Support Payment (LSP) be introduced. The payment would be a maximum of 2% of inforce premiums, and could not be passed on to advisers, Mr Trowbridge said.

In its submission to the Trowbridge review, ClearView called for a ban on shelf-space fees and other related licensee payments, arguing that they are inequitable.

“A number of dealer groups require upfront payments, which start from around $100,000 and rise to over $300,000 per annum for life insurance products, to be placed on their Approved Product List. This means that customers are often recommended a product, not because it’s the most suitable and appropriate, but because of an insurance company’s willingness and ability to pay shelf space fees,” ClearView CEO, Simon Swanson, said.

Approved Product Lists

ClearView was also vocal about its opposition to narrow Approved Product Lists (APLs), arguing they should be viewed as an ‘advice quality warning sign’.

Mr Trowbridge took a similar view, observing in his report that: ‘The courts have already begun to note that limited APLs fundamentally fail to meet the objectives around the provision of advice in a client’s best interest’.

The Trowbridge Report recommended that licensees be required to include at least half of the 13 authorised retail life insurance providers on their APL. This recommendation, according to the report, would enable advisers to consider a broader, more diversified range of providers and products containing different features and benefits.

Implementation of this measure would be left up to the individual licensees, which Mr Trowbridge acknowledged would make enforcement difficult. However, the Report suggested that ASIC review licensee APL practices – in particular whether the processes around products that sit outside the APL are being adhered to – in order to provide suitable guidance to licensees in this area.

One factor to consider, however, is that even though broad insurance APLs already exist across a variety of licensees, the majority of advisers favour only two or three providers. According to the 2014 Investment Trends Planner Risk Report, the average number of insurance providers used by advisers was found to be 3.7. The report also showed that the primary insurer used by a planner received 59% of the adviser’s premiums.

Adviser competency and client recommendations

Recommendation 5 of the Trowbridge Report called for all licensees, in conjunction with their advisers, to re-examine their culture, behaviours and practices regarding the advice process, with the aim of raising consumer understanding of life insurance, ensuring informed consent from clients, and reducing the administrative burden on advisers. These cultural adjustments, said Mr Trowbridge, are generally changes that need to be initiated by licensees.

Noting that the industry is already examining the education and professional standards of advisers – through the Financial System Inquiry and Parliamentary Joint Committee on Corporations and Financial Services inquiry – the Trowbridge Report recommended the industry develop a ‘best practice advice process’ for life insurance advice.

ASIC proposed a similar measure in Report 413, providing a comprehensive, four-page checklist of factors for advisers to consider when giving life insurance advice. The checklist covers an adviser’s obligations under the Corporations Act, as they relate to life insurance advice, and recommendations that are considered ‘best practice’.

At the heart of this recommendation is the objective of creating a heightened focus on client engagement, client education and informed client decision-making. A current example of this approach in action is 2014 AFA Adviser of the Year, Eleanor Dartnall. Ms Dartnall has built in an education component into her client onboarding process, to ensure that when the time comes to present the client with a Statement of Advice, the client truly understands what they are signing.

She notes that in taking this approach, her work as an adviser is harder, it takes longer to get to the implementation phase, and the education component is effectively free to clients. However, her 100% conversion rate and exceptional business growth over the past 18 months demonstrates there is value in rethinking advice delivery. (For more on Eleanor’s process, see AFA Adviser of the Year Diaries in this edition of riskinfo eMagazine.)

Statements of Advice

According to Mr Trowbridge, while education and competency standards play a significant role in improving culture and behaviours, culture cannot readily be adapted to the needs of clients without also adapting business processes. With this in mind, the Trowbridge Report recommended the industry conduct a review of Statement of Advice (SoA) requirements.

In particular, the Trowbridge Report acknowledges that SoAs suffer from issues relating to length, complexity, and a desire to meet the compliance requirements set out by the licensee. Mr Trowbridge observed that, given the extensive obligations imposed in relation to SoA requirements, and the severity of implications arising from a failure to provide a compliant SoA (amounting to an offence under the Corporations Act), it is understandable that a thorough approach be taken when preparing an SoA.

The recommended approach to address SoA issues is to appoint a task force, representing professional associations and advisers, to explore and make recommendations to the advice sector, in conjunction with ASIC, for improving the advice process and associated documentation. At this stage, it does not appear that any of the primary advice associations have taken up this call to action, but this is perhaps understandable given the current focus of the debate is on securing a viable adviser remuneration model.

From a regulators’ perspective, both ASIC and the Financial Ombudsman Service (FOS) have acknowledged that the financial services industry is too reliant on disclosure (documentation), and that it is not always effective.

However, the final observation that ASIC made in relation to case files in Report 413 was that more documentation from advisers was needed. In fact, in a small number of cases observed in the review, the file notes were so brief as to make it impossible for the ASIC analysts to determine whether the advice was compliant or not. The clear recommendation from ASIC is that ‘more is more’. Without documentation that sets out the basis for the advice, the adviser’s recommendations may be deemed inappropriate, even if the client and adviser agreed on the approach.

In contrast, FOS would appear to favour simpler SoAs. In January 2015, FOS released an ‘Approach Document’ on how it assesses SoA adequacy, highlighting it receives many complaints from clients saying they did not understand the advice provided by their adviser. FOS says it first looks at whether the information in the SoA is ‘clear, concise and effective’. Specifically, the regulator investigates whether the SoA:

  • Is expressed in plain language
  • Is brief yet comprehensive
  • Promotes understanding of the adviser’s recommendations

FOS also noted it is more likely to be critical of a templated-SoA, because they are, in the regulator’s experience, more likely to use industry/technical language and include irrelevant information.

Insurer conduct

Code of practice

The Trowbridge Report recommended a Life Insurance Code of Practice be developed, aimed at setting standards of best practice for life insurers, licensees and advisers, for the delivery of effective life insurance outcomes for consumers.

Submissions raised a number of areas that could be considered in the development of a Life Insurance Code of Practice. They include:

  • Standards of practice during the life cycle of the life insurance process, including standards of behaviours for insurer employees such as Business Development Managers
  • Product disclosure to be succinct, transparent and in plain English
  • Suggested standardised practices for insurers and advisers dealing with nondisclosure, pre-existing conditions and other matters
  • A commitment to consumer education especially in relation to life insurance concepts
  • Improved consumer access to information
  • Standards for underwriting practice, for example clearly communicating why insurance coverage is not provided in certain circumstances
  • Standards of practice for policy increases, such as a fair and reasonable, and efficient approach to handling requests to ‘increase’ or ‘alter’ an existing insurance policy online, including ensure an efficient underwriting process on par with new business
  • Standards for claims handling, such as: (i) fast tracking assessment and decision process when an urgent financial need of benefit is necessary; (ii) best practice timeframes for claims assessment; (iii) best practice communication requirements during the claims process
  • Standards for handling financial hardship
  • Complaint and dispute processes, including internal and external processes
  • Principles around providing a legitimate upgrade path for clients to current policy series or backdating of definitions for conditions a client is already covered for.

Mr Trowbridge suggested the Life Insurance Code of Practice be modelled on the general insurance industry’s Code of Practice. The general insurance Code is administered by the Insurance Council of Australia (ICA), a membership body similar to the FSC, which represents Australia’s general insurers. In July 2014, the ICA introduced a new Code of Practice, although it should be noted the industry has operated with a Code for decades.

According to the ICA, the Code, which is written in plain English, sets out the standards that general insurers must meet when providing services to their customers, such as being open, fair and honest. It also sets out timeframes for insurers to respond to claims, complaints and requests for information from customers. The Code covers many aspects of a customer’s relationship with their insurer, from buying insurance to making a claim, to providing options to those experiencing financial hardship, to the process for those who wish to make a complaint.

Trowbridge’s message to advisers

Addressing the question of why advisers have been arguably unfairly targeted in the proposed reforms, Mr Trowbridge said advisers had every right to feel persecuted.

“They’ve been criticised up and down the country, by consumer groups and regulators, and yet they are only one part of the chain. They individually cannot do a lot about this without the insurers and the licensees. Nearly all advisers are ethical [and] conscientious… But they’re in an environment that is not of their own making.”

He had the following message for advisers: “Talk to your licensees, engage with them and try to review the business model. There’s a particular recommendation about that. Look ahead so that you are ready for three years’ time. The new model is economically viable, as long as licensees and advisers take action to become more efficient.”

What’s next?

The Government

In April 2015, Assistant Treasurer, Josh Frydenberg, acknowledged the work the industry had done to achieve a package of reform recommendations for the life insurance sector. However, he warned that the industry had “weeks, not months” to respond and act on the recommendations.

“Appropriate reform, made as soon as possible, must be led by the industry itself. Industry should not force the heavy hand of Government to act,” Mr Frydenberg said.

The time pressure is coming, in part, because of the need for the Government to provide its response to the final FSI report, which is due at the end of May 2015.

The regulator

Speaking after the release of the Trowbridge Report, ASIC Commissioner, Greg Tanzer, said:

“We are giving the report careful consideration to understand the response of industry and engage with stakeholders, including the Government, who are also considering some of these issues in the context of their response to the Financial System Inquiry.

“In terms of our ongoing work, we continue to see problematic life insurance advice in our surveillance work. It is a live issue. The sooner we deal with the issues, the sooner we can achieve better consumer outcomes and restore trust and confidence in the industry.

In terms of follow up work from Report 413, ASIC said it was continuing its investigations into AFS licensees where it has found significant breaches of the law, inappropriate advice or poor compliance cultures. “We may also take administrative action against individual advisers,” Mr Tanzer said.

The insurers

AMP has become the first insurer to make a move on adviser remuneration, mandating it will no longer pay high upfront commissions on its insurance products.

AMP will cap the commission payable on its life insurance products to all advisers, regardless of licensee, reducing upfront commission to 80% with an ongoing commission of 20%, to take effect from 1 July 2015.

Announcing the changes, AMP CEO, Craig Meller, said it was clear the Australian life insurance industry needed to reform in order to help restore customer confidence.

“This confidence is essential for AMP to achieve its most important objective – offer financial advice to help people improve their lives. These changes, which are initial steps towards a fee for service model, support this objective,” Mr Meller said.

It is not yet clear whether other insurers will follow suit, or if they will elect to wait until the Government makes its position clear. However, initiatives from large licensees (see AMP measures below) may force the hand of other providers.

The licensees

Together with its change hybrid commissions for its insurance offerings, AMP has also mandated new remuneration rules for its licensees. AMP licensed advisers (including its aligned brands such as Hillross), will be subject to a maximum 80% upfront commission for all life insurance policies, with an ongoing commission of 20%, irrespective of the life insurance provider.

AMP advisers will only be able to access year one commission once every five years, and this measure will apply to all insurance policies written since 1 July 2010. AMP licensees will also require other life insurance providers on their APLs to comply with the hybrid payment model and single payment period.

Centrepoint Alliance, the parent company of Professional Investment Services, has also mandated hybrid commission for its representatives. From 1 July 2015, only level or hybrid commission options will be permitted, although the licensee has not specified the rate of these commissions.

According to Centrepoint Alliance CEO, John de Zwart, the decision had the overwhelming support of its adviser network.

Taking a different line, Synchron has decided to tackle the issues surrounding life insurance advice by pushing for a new product design. The group has designed a product structure which will have a number of level premiums, delivered over a set term, similar to policies in the UK.

Synchron Director, Don Trapnell, said the licensee had initially approached three insurers with the proposal, who had responded with interest.

“The industry is changing at break neck speed. While we are pleased by recent announcements from AMP and Centrepoint, there are other levers that need to be pulled and addressed. At Synchron we believe it is up to us to not just follow others, but to take on a leadership role. The product structure we have designed goes a long way towards doing just that,” Mr Trapnell said.

The associations

The FPA has released a ‘Life Insurance Blueprint’, which contains ten recommendations to address the issues surrounding life insurance advice. The Association said it believes in the retention of commissions for risk advice, and that these should be paid at a higher rate in the first year. The FPA’s recommendation is that upfront commissions should be capped at four times the ongoing commission payment.

Among the other recommendations put forward by the FPA are the introduction of:

  • A two-year responsibility period
  • A three-year transition period to move to the new commission model
  • Life insurance product innovation which enables advisers to dial down commission and implement a separate adviser fee
  • A ban on all other forms of conflicted remuneration including volume based payments, rebates and shelf space fees
  • A system where life insurance companies are required to report financial advisers that are churning to the regulator for review

The AFA has made its position on the remuneration model proposed by Mr Trowbridge very clear, arguing that unless it becomes less expensive for the adviser to provide the advice, or insurance premiums reduce substantially as a result of the recommendations, then fewer Australians will be able to afford life insurance advice.

Instead, the AFA is lobbying for the retention of hybrid commissions, saying the ASIC report clearly called out this model as a workable solution to the issues caused by upfront commissions.

In a recent message to members, AFA President, Deborah Kent, said: “We are encouraging advisers and licensees to endorse hybrid and level commission remuneration and remove high-upfront commissions from use and also to take actions to enforce strong adherence to the best interest duty, thus removing churn. We encourage you to make your voice heard with your licensee – don’t leave it to chance – know where they stand.”

The FSC has committed to delivering its response on the Trowbridge Report to the Assistant Treasurer before the end of May 2015. The Council also confirmed its Life Board and Advice Board will be meeting to formulate their approach and actions with regard to the Trowbridge best practice recommendations and Life Insurance Code of Conduct.

FSC CEO, Sally Loane, noted that “…if you can get improvements in insurer practices… through a Code of Practice, then that will have flow-on effects to reducing the costs of providing advice and helping advisers”.

A future without high upfronts

While it is always difficult to predict the future state of any reform program, it would seem extremely likely that high upfront commissions for life insurance advice will be removed. What the industry will do to address the fallout from this remains unclear.


Emily Saint-Smith is riskinfo’s Senior Journalist.

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