It’s difficult to shake the feeling that the regulatory net is closing around risk insurance commissions.

A proposal in last week’s Cooper Review report to axe commissions on life insurance products sold via superannuation is a major development, with significant ramifications for financial planners given the millions in commission payments currently changing hands.

The final report of the Review into the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System is a weighty tome containing 174 recommendations. Among them is a recommendation to exclude all insurance from super other than life, total and permanent disability and income protection cover.

The proposed rules around life cover include clearer disclosure and the proviso that “up-front and trailing commissions and similar payments should be prohibited in respect of any insurance offered to any superannuation entity… regardless of rules on commissions that might apply outside superannuation”.

The report argues that commissions are an unnecessary cost burden carried by superannuation investors, and even goes as far as to grant members of the proposed MySuper default fund the right to opt out of life insurance altogether.

While generally supportive of the overall thrust of the Cooper Review, Financial Planning Association (FPA) CEO Mark Rantall has come out swinging, telling insuranceNEWS.com.au that when it comes to life insurance commissions the Federal Government risks “throwing the baby out with the bathwater”.

“I can’t see any problem on commissions on insurance as it relates to super,” he said. “We have an underinsurance problem in Australia, and that extends from life to home to motor vehicle cover. This recommendation is likely to present another affordability issue.”

Mr Rantall says people on lower incomes are likely to suffer as a result of a ban on commissions.

“More affluent earners will still be able to easily access the kind of holistic advice that includes risk insurance,” he said.

The rival Association of Financial Advisers (AFA) agrees, warning that extending a ban to risk insurance would limit consumer choice and possibly exacerbate underinsurance.

Aside from leaving hordes of financial planners potentially out of pocket, the proposal leaves other risk insurance intermediaries wondering if they are next in the firing line. The Cooper Review comes hot on the heels of Federal Government confirmation it will include risk insurance in a Future of Financial Advice reform proposal to investigate a potential ban on commissions.

Financial Services Minister Chris Bowen has clearly started a desire to weed out “conflicted remuneration structures” within the financial services sector, starting with the retail investment products that caused so much pain in cases such as Westpoint and Storm Financial.

Though consideration of a ban on risk insurance commissions will focus primarily on life insurance, this is no time for general insurance industry complacency.

Mr Rantall says the “line in the sand” hasn’t yet been drawn, and general insurance brokers could quite easily find themselves on the same side of it as financial planners.

“Where do you start and where do you stop?” he said. “If you’re going to throw life in there, how about general insurance and mortgage insurance? That is a big market out there you’re looking at tackling.”

He believes such legislative tinkering is unnecessary as far as his members are concerned, pointing to work the planning sector has already undertaken to address concerns highlighted by high-profile corporate failures.

The National Insurance Brokers Association also intends to keep a close eye on developments to ensure its voice is heard.

CEO Noel Pettersen says apart from “well-documented differences” between life and general insurance products, remuneration by commission for general insurance brokers “plays a vital part in the distribution of products by insurers”.

“Commission should be viewed as a distribution cost,” he told insuranceNEWS.com.au. “After all, we are seeing less and less representation by insurance companies in regional areas, and brokers perform many back-office functions for the insurer for which they are entitled to be paid.

“Why upset a process that works for all concerned?” Mr Pettersen said. “There is no evidence of market distortion or consumer-driven need for change.”

The “if it ain’t broke don’t fix it” argument is compelling, but not necessarily in line with global regulators’ determination to rid financial services of potential conflicts of interest.

Opposition to a ban on life insurance commissions through super will be strongly resisted by the financial advisers, and their success or otherwise may well decide what will happen in the future to other risk insurance commissions.