The Federal Government’s Future of Financial Advice (FOFA) reform program brings to mind the saying about a camel being a horse designed by a committee.

The headline items of banning life insurance commissions, volume payments and soft dollar benefits suddenly change when reading the small print of Assistant Treasurer Bill Shorten’s announcement on the proposals.

The ban on life insurance commissions only applies if the products are sold as part of a superannuation package.

The ban on volume payments will not apply to advisers selling life insurance products outside superannuation, Treasury has confirmed to insuranceNEWS.com.au.

The ban on soft dollar payments for dinners and speakers at conferences does not apply to advisers selling life insurance products outside superannuation.    

While it is encouraging that the life insurance industry is being recognised as one of the better-behaved members of the financial advice industry, it is hard to fathom why a sale is treated in two different ways.  

This two-tier system is going to create some administration nightmares for dealer groups trying to work out which advisers sell life insurance inside superannuation and which don’t.

Under the proposals, an adviser selling life insurance to a member of a self-managed superannuation fund will be banned from a commission, volume payment and any soft dollars.

But if that same adviser sells a life policy to somebody outside superannuation, they can have a commission, a volume payment and attend the sponsored dinner at the annual conference.

Under FOFA, the dealer group would be expected to distinguish who is selling what to whom.

It will also be an interesting situation when advisers decide to sell their businesses, because reoccurring income is the key to valuations.

In the future, such a business will have to be valued on a superannuation and non-superannuation revenue basis.

While Treasury believes it has eliminated conflicted payment structures from superannuation, in the real world advisers will now just sell risk insurance products direct to maintain the status quo.

This two-tier structure on life insurance commissions and payments has caught the financial services lobbying industry by surprise and has provoked the strongest outcries.

Lobbyists had hoped life insurance would have been excluded from any commission ban, but in recent weeks there had been whispers a total ban was coming.

But the two-tier system has produced a wave of disapproval from associations such as the Financial Services Council (FSC), the Financial Planning Association (FPA) and the Association of Financial Advisers (AFA).

FSC CEO John Brogden says the proposal to allow commissions on directly advised life insurance outside super while banning them on the same product inside super “makes no sense”.

“It will distort the market and will likely see less insurance purchased – worsening Australia’s underinsurance problem.” 

But not all of FOFA is bad news for the life insurance industry, as Rice Warner Director Richard Weatherhead told insuranceNEWS.com.au.

He says there are new opportunities for advisers to grow their businesses selling life insurance products in superannuation by switching to a fee structure that is agreed with the member.

“Many advisers who provide advice to superannuation fund members on life insurance do charge a fee,” Mr Weatherhead said.

“The fee can be deducted from the member’s superannuation balance or it can be spread over a period of time such as 10 years.”

He says any lost business from the restrictions on commission from superannuation-related sales could be recovered from the new “scaled advice” proposal.

This new form of advice will allow advisers to talk to clients about a single topic, such as insurance, without having to undertake a full financial analysis of the client’s needs.

“It will mean direct life insurance sales will get a boost,” Mr Weatherhead said. “Now advisers will be able to sell the product with a simplified statement of advice.”

How far the advice will be simplified will become evident when the Australian Securities and Investments Commission releases a discussion paper in the middle of this year.

This and the FOFA reforms, when they become law, will change the way financial advice is delivered in Australia, but for the life insurance industry the impact is minimal.

All the associations will be lobbying the Government hard between now and when the legislation is introduced, but Treasury seems determined to keep all payments, other than fees, out of superannuation.

With that level of determination by Treasury, it looks like the industry will just have to get used to riding a horse that resembles a dromedary.