Bracing for conflict on intermediary pay
The Hayne royal commission has the general insurance industry’s exemption from the ban on conflicted remunerations in its sights.
But brokers and insurers are fighting back, arguing it must remain in place or consumers will suffer.
To understand the argument, we need to understand the context. What is the ban on conflicted remuneration, why was it introduced, and why was general insurance spared?
The ban, in Section 963A of the Corporations Act, was introduced following the Future of Financial Advice (FOFA) reforms in 2012.
It was designed to prevent distributors of financial products pushing clients towards one product or another because of the commission the distributors stood to gain.
It’s quite a mouthful, but for the avoidance of doubt, here’s the official definition:
Conflicted remuneration: any benefit, whether monetary or non-monetary, given to a financial services licensee, or their representatives, who provides financial product advice to retail clients that, because of the nature of the benefit or the circumstances in which it is given could reasonably be expected to influence the choice of financial product recommended by the licensee or representative or could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative.
Some forms of conflicted remuneration were, and still are, allowed to continue. One key exemption relates to general insurance products.
But now the royal commission has cast a shadow over the status quo.
Its “policy questions” document released following insurance hearings last month floats the possibility of doing away with the exemption.
It asks: “Should monetary and non-monetary benefits given in relation to general insurance products remain exempt from the ban on conflicted remuneration? If so, why?”
The question is no doubt inspired by the high commissions and incentives insurers threw at motor dealerships selling junk add-on cover.
But brokers would also be caught up in such a change. Follow-up questions in the document shed further light on where the royal commission’s thinking is heading.
“Is banning conflicted remuneration sufficient to ensure sales representatives do not use inappropriate sales tactics when selling financial products? Are other changes, such as further restrictions on remuneration or incentive structures, necessary?
“If the ban on conflicted remuneration is not extended to apply to general insurance products, should the payment of commissions for the sale of add-on insurance by motor dealers be limited or prohibited?”
We don’t yet know how Commissioner Kenneth Hayne sees it – insurance was not included in his interim report. But we know the general insurance industry is already fighting back.
The Insurance Council of Australia (ICA) has not released its royal commission submissions, but responded to questions from insuranceNEWS.com.au.
It says it is “supportive of exploring reform options to ensure commissions do not exceed acceptable levels”, but adds that removing the conflicted remuneration exemption for general insurance “is not warranted”.
“Commission-based remuneration plays a legitimate role in supporting the accessibility of general insurance products,” it says.
“Banning commissions for the sale of general insurance products would be detrimental to brokered sales. If commission sales for retail insurance were to be banned, brokers would probably cease providing advice on retail insurance products.”
The National Insurance Brokers Association (NIBA) has published its submission to the policy questions document, and singles out the conflicted remuneration issue as its key concern.
NIBA CEO Dallas Booth tells insuranceNEWS.com.au there were good reasons for the general insurance exemption at the time – and those reasons remain.
“Our submission at the time of FOFA was that, in theory, the principle [of banning conflicted remuneration] had validity. But in practice, in general insurance broking, commissions have not distorted the sale of general insurance products or led to poor consumer outcomes.
“General insurance is an annual product reviewed every year. There are no trailing commissions. Commissions are broadly the same across all insurers, so there is no great incentive to place cover in one place or another.
“And brokers always focus on the client – getting the right cover in place at the right price.
“In theory, [conflicted remuneration] is an issue. But in practice, all these factors come together and mean that it works fine.”
In its submission, NIBA outlines the possible effects of removing the exemption.
“Were a ban applied there would most likely be significant adverse effects on consumers (in particular small businesses) and the community arising from any alternative fee-for-service type model,” it says.
It warns it would affect the affordability of advice, reduce access, lower claims settlements, restrict policy covers, reduce cover for unusual risks, increase insurance prices, reduce competition and increase underinsurance.
NIBA has no doubt insurers’ commissions to distributors such as motor dealerships and travel agents are the reason the royal commission is looking so closely at this issue. It continues to assert that brokers have done very little wrong.
But only time will tell if brokers become collateral damage regardless.