LIF’s Long Path From Legislation to Law

The return of the Turnbull Government will lead to the reintroduction of the Life Insurance Framework legislation, with indications this will take place before the end of the year.
While the Government has the numbers in the lower house, it will rely on the support of other parties in the Senate to pass any form of legislation.
In this article, riskinfo’s Senior Journalist, Jason Spits looks at the timeframes and processes the Government has already gone through and those it will still have to navigate if it plans on passing the legislation in the coming months.

An unwanted celebration

The Life Insurance sector is about to celebrate an anniversary that few are likely to remember with great fondness and which many blame for the uncertainty which currently surrounds life insurance advice.

October 9 will mark two years since the release of ASIC Report 413: Review of Retail Life Insurance and the November 6 will mark a year since the release of the first draft of legislation aimed at dealing with the supposed issues uncovered in that review.

Much has been written about the review, with many advisers finding fault in its scope and its findings, and much has also been written about the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, or Life Insurance Framework (LIF) as it has become known, with many advisers also casting doubts about the usefulness and consumer benefit of the legislation.

Nearly two years after the bombshell of ASIC Report 413, advisers, insurers, associations, regulators and consumers have yet to see any legislative change despite the proposed legislation moving through two drafts and into Parliament before it was suspended due to the calling of the July 2016 Federal Election.

Looking behind to look ahead

So, does the passage of the legislation into Federal Parliament earlier this year give any indication of what may happen if, and most likely when, it is introduced into the current Parliament?

Consider that from the time of its introduction into the House of Representatives on 11 February to a movement for a second reading in the Senate on 16 March – following a brief referral to a Senate sub-committee which recommended the legislation be passed  – it took only five weeks.

The official reason the legislation did not become effective from 1 July 2016 was due to the calling of the Federal Election. However, riskinfo has been informed that delays in formulating regulations that would enable the legislation were also responsible for it not getting across the line during the last sitting of Parliament.

This would seem to be confirmed by reports that ASIC was still receiving submissions on the regulatory instrument it would use to oversee life insurance under the legislation until 31 May, three weeks after the date the election was called – 9 May.

Also consider that the work of ASIC was not suspended due to the calling of the Federal Election and neither was it directed by Treasury to suspend work on creating that instrument, which was originally slated to be ready for the initial start date of the legislation on 1 July 2016.

Any thoughts that the LIF legislation may not come back into Parliament were also scotched recently when the Minister for Revenue and Financial Services, Kelly O’Dwyer stated it would be reintroduced in the spring sitting, which runs from 30 August to 1 December and during which both the House of Representatives and the Senate will be sitting.

A question of timing

Actual dates have not been provided and the Government will likely seek to tackle Budget related issues first alongside its changes to superannuation and the legislation that would allow a plebiscite on same-sex marriage.

However, suggestions have been made to riskinfo that an introduction date in early October would allow sufficient time for the legislation to pass through both houses before Parliament rises on 1 December and become law before the end of the year while also creating a 1 July 2017 start date.

While Minister O’Dwyer did not comment on whether there would be any material changes to the legislation, she did confirm it would cover direct insurance channels as well as advised insurance, reinforcing statements made in November 2015 when the second draft of the legislation was released.

Given that the Government has both proposed and drafted the legislation it would be safe to assume that it will be introduced in the same form, that is with a transition from 80% upfront commission to 60% upfront commission over three years, a fixed 20% ongoing commission rate and a two-year clawback period.

Bipartisan support?

While the Government has 76 seats in the House of Representatives, enough to pass the legislation through the lower house, it does not have a clear majority in the upper house where the Liberal/National Party Coalition has 30 Senators compared to the ALP’s 26, the Green’s nine and 10 Senators spread across five minor parties.

To pass the Bill in the Senate would require the support of nine non-Coalition Senators, and assuming the Opposition does not change its stated position of supporting the legislation, the Government may not have to resort to support from the cross benches.

This support was articulated on a number of occasions prior to the election with the former Shadow Minister for Financial Services and Superannuation, Jim Chalmers stating in March that “…Labor does support the passage of this legislation that will make incremental improvement to the life insurance remuneration structures”.

He added, “We know that that view is not universal in the sector or in the community but we think all of these bills are on-balance calls and we think, on balance, this bill is worth supporting.”

Further support was expressed by the two Labor Party members of the six-member Senate committee that reviewed the legislation in March and recommended it be passed by the Senate.

In additional comments to the committee’s report the two Opposition senators – Chris Ketter and Sam Dastyari – stated “Labor senators on the committee welcome the committee’s report and support the reform that this bill is designed to achieve”.

Interestingly, they also raised concerns that ASIC’s Report 413 used an inadequate data sample, that the legislation would adversely affect consumer choice and increase the cost of life insurance and related advice, and create a decline in adviser numbers, but did not specify any action that should be taken to address these concerns.

In the event the Opposition has reversed its position on the legislation the Government will have to negotiate with the minor party Senators, many who have yet to see the legislation but have reportedly been contacted by advisers informing them of the issues mentioned by Ketter and Dastyari.

The wider context

While no legislative change ever takes place in a vacuum the situation surrounding the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 has continued to shift inside and outside the walls of Parliament creating an unusual confluence in timing.

While the Minister who was first involved in the legislation has shifted from Josh Frydenberg to Kelly O’Dwyer, calls for a Royal Commission covering banks, financial advice and possibly life insurance have been raised before, during and after the recent Federal Election but have been resisted by the Government.

These calls have been spurred by regular mainstream media coverage of claims related problems among some larger insurers, typically in the unadvised, group life sector or by the trustees of superannuation funds.

These two areas, among others, will become the subject of an inquiry by the Parliamentary Joint Committee on Corporations and Financial Services which is due to report on 30 June 2017, the day before the likely start date of the LIF regime.

The inquiry was recently called by Nationals Senator, John Williams, and picks up on a previous inquiry and an election commitment from Williams to take a deeper look into the life insurance sector. (LINK 8)

Scrutiny around the efforts of the Association of Financial Advisers (AFA) to push back against the LIF remuneration model and of the Financial Services Council in pushing for the changes has also been building since March with a group of advisers, under the title of the Life Insurance Consumer Group (LICG) being critical of the actions of both.

In a series of press releases from the group the FSC has been challenged to describe the consumer benefits of the legislation but has not yet made any formal response to the LICG, nor does it appear likely that it will.

More pointed action has been directed towards the AFA with a member of the Association and LICG supporter, Mark Dunsford, calling for an Extraordinary General Meeting (EGM) to vote on a resolution which would formally commit the AFA to “…proactively continuously and wholeheartedly oppose the introduction or passing of the former Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 or any other legislation substantially to the same effect or purpose”.

The AFA has announced the EGM would take place on 6 October in Canberra at its 2016 National Conference, the same day as its Annual General Meeting, and possibly around the time the legislation which led to the meeting was working its way through the nearby houses of Parliament.

Coming full circle

Yet the most interesting time surrounding LIF is still in the not too distant future – 2018, when ASIC will conduct an examination of the effectiveness of the legislation in dealing with the issue which has led to all these efforts – adviser generated churn.

Given that life insurers, the FSC and ASIC itself don’t currently appear to have any concrete numbers on the extent of churn means that 2018 may either vindicate all those who pushed for change or prove right all those who resisted it.

  • Jimmy

    I’m sure that both ASIC and the FSC will again target a specific group of advisers identified by the insurers as their “representative sample”. They’ll look at another 202 files and determine that things are still bad in insurance land and that commissions will need to be hacked away further. Cynical? No, just realistic.

    On the positive side, i have been writing to my local Federal MPs to try and highlight the differences between advised, group and direct insurance. Fortunately it appears that one of my local MPs has a former adviser as an assistant. They are over the issues with the proposed LIF and will be speaking against it. Hopefully that will be enough to stop the Minister for Increased Bank Profits, Ms O’Dwyer, from implementing this policy in its current form.

    • Kelly Roche

      well said Jimmy.

    • Jeremy Wright

      I have also had an hour with my local Federal MP and he was amazed at what has occurred.

      He is going to have a word with Bert Van Manen, the member for Forde ( who stood up for advisers and objected to the LIF as patently unfair ) and having had experiance as a Planner, he knows what the real world of advice is about and is a man with integrity.

      My Federal member asked very intelligent questions and has a genuine concern that this could be a case of the big end of town trying to screw small Business for their own means, to massively increase their profits at the expense of all Australians.

      It is very easy to contact your local Federal member and from what I have heard, most of them are willing to listen and are interested to learn, so please contact them now before this unworkable LIF is hurriedly pushed through and becomes legislation.

  • Robert Coyte

    I saw that some advisers were recently banned from advising by ASIC for these very practices because they did not act in their clients interests. This is the current law (FOFA) and if applied thoroughly to all advice it would remove churn as it doesnt meet the current legislation requirements.

    LIF will not result in less churn or anything else for that matter its simply a redistribution of wealth from financial advisers who provide advice to the vast majority of ordinary Aussie who don’t or wont pay fees for financial advice. This statement will be vindicated in a few years time the same way it was when the UK did the same thing in 2013.

  • Jeremy Wright

    There seems to be a, “let us try it and see” mentality, caused in large by some Life Companies, Banks and the FSC pushing their barrows in this direction, which will obviously benefit them, at the expense of everyone else, as there has been no pressure exerted by the Government, to force the Life Companies to re-invest their extra new found profits, back into efficiency gains in the New Business and ongoing administration area’s that will free up advisers to see more people.

    It does not help when the likes of Sue Viskovic continue espousing the virtues of the big and of town’s argument, which simply is to put 100% responsibility onto advisers and no care or responsibility back onto themselves.

    It is all very well to make statements. It is entirely different to actually live with it.

    The only way a 60% / 20% model will work, is when the Life Insurance Industry and regulators make it much quicker and more efficient for advisers to place and manage the Life Insurance needs of Australians.

    As to a flat 20% commission model, or fee only service model, this is the stuff of fantasy, based on theoretical mumbo jumbo, as no full advice, best interest duty Life Insurance practice will survive trying that approach.

    I would suggest all those people who consider a $2,200 fee, for full advice and implementation as a viable proposition, you might need to get some professional advice before you proceed down that path, as my crystal ball sees dark clouds, storms, no profit and unsustainable losses ahead for you.

    I am yet to see one risk only practice that has succeeded with a level or fee for service model and not one holistic multi advice practice that has properly calculated the true cost of providing comprehensive, best Interest duty advice and implementation, that will pay sufficient profits for the risk and ongoing compliance hurdles around Retail Life Insurance advice.

    What I have seen is cross subsidisation which puts a choke on the long term profits of Adviser practices and creates an artificial knowledge, that allows Life Companies to believe that they are efficient and do not need to make the necessary changes NOW to be competitive in the near future.

  • Margaret Marks

    So lets get back to basics. Firstly there is absolutely no evidence that supports the implementation of the LIF legislation. There is likewise absolutely no evidence of one single benefit for consumers. The LIF is an FSC sponsored initiative which will only have one measureable outcome and that is to magnify the banks’ and insurance companies’ already record profits. I believe in the hybrid model of 80/20 and a one year clawback (Which Zurich and Clearview have given an agreeing nod to). But everything other than this is just an attempt to put non-bank advisers out of business. It is as simple as that and the Government is backing this all the way. In fact the Minister’s latest press release said it was due to the efforts of the AFA and FPA that she felt confident to bring in the LIF. Of course the AFA and FPA are financially dependant on the banks and insurance companies, they are clearly conflicted, and this is why we have the LIF. NO OTHER REASON. If the AFA and the FPA had done the HONEST thing and put the LIF to a vote of their members, there would not be wholesale support for the LIF as the Minister has claimed.

    It is time that we had a new Risk Adviser Association, without any conflict that has sufficient numbers to lobby Government on behalf of advisers and consumers. If you would like to form such an association email action@licg.com.au with your thoughts.

  • Paul Underwood

    Firstly, not sure why the article refers to Phil Thompson as a fee-only adviser when he clearly states that he takes commissions for risk insurance? No wonder the politicians and the general public are confused as the media can’t even get it right. If he takes commissions on insurance he is not fee for service only.

    Secondly, if an adviser is getting friction about the sums insured recommended versus how much they get paid then in my opinion there is something wrong with their insurance recommendation process and the value the client perceives they are receiving, and taking level commissions does nothing to reduce that conflict. So while the client may “feel that they are not being pushed in a certain direction because of the commissions for the adviser” the reality is the adviser will actually get paid more over the long term for that advice which I would think has the potential to increase the conflict not reduce it.

  • Alleycat

    What gutless outcome!!
    What was the point of the PJC enquiry ,if not to point out the stupid and fallacious premise, as the basis of the LIF legislation.
    The legislation now sounds the death knell of the independent life adviser, the destruction of public confidence in the life insurance industry,… and for what ?
    Just to satisfy left wing flawed ideology coupled with increased profits for members of the FSC.
    Where was any of this in the public interest ?
    This is just a metaphor for how spineless our politicians are, with Malcolm in Middle and all his hand maidens together with those in the Labour party plus the fringe tree hugging dwellers, have gone about destroying a vibrant nation with debt, deficit and utter contempt for the majority of the people of this country!!!

  • Paul

    It sounds like the mental health focus was purely on how to make insurers pay more mental health claims. Where do these politicians think the money will come? The mythical unlimited profit reserves of the evil insurers? No, it comes from increased premiums.

    There has already been an explosion in mental health claims in recent years, with a flow on effect of major premium increases, which is generating a flow on effect of increased lapse rates, which will generate a flow on effect of many more uninsured people suffering from financial hardship to a much wider range of illnesses.

    There needs to be a complete overhaul of mental health claims in disability insurance. The current trend of paying claims based on appeasing the political correctness lobby is killing off the system for everyone. Perhaps it’s time that mental health was removed from private sector disability insurance altogether, and more fully covered by DSP and NDIS instead.

    That way the politicians and taxpayers can decide what is reasonable evidence of disability and a reasonable level of funding, rather placing the burden on an ever diminishing group of privately insured consumers to carry the mental health funding burden via their with constantly increasing premiums.

  • Old Risky

    Jason-I may have missed the reference, but I could not see any acknowledgement by ASIC, FSC or any insurer to the absolute necessity to have a common detailed definition as to what constitutes a lapse.
    Until that is achieved to enable true reporting of “churn “( also requiring a definition ) , all the effort will be in vain

  • Loch Slòigh

    The Banks and AMP win no matter what because the vast majority of non-aligned advisers will not be able to survive the 3 years leading up to the 2021 review. Hence less competition and the winners will be able to exert even more control over the industry.