Banning life insurance commissions would lead to “destructive” consequences, as most Australians have indicated repeatedly in past surveys that they will not pay an upfront fee to receive professional guidance, the Association of Financial Advisers (AFA) says in a submission.

The AFA submission to the Quality of Advice Review – a recommendation made by the Hayne royal commission – says it supports the Treasury-led exercise and “holds out hope that the current material problems in the financial advice market can be addressed” through the consultation.

However, removing the remaining exemptions from the ban on conflicted remuneration is not the answer, according to the peak body.

“The removal of commissions on life insurance would have a destructive impact on the life insurance market,” the AFA submission said.

“The vast majority of clients will not pay for life insurance advice other than a small amount for the statement of advice.

“Even when offered the choice to pay a fee or a commission, consumers invariably choose a commission.”

The Quality of Advice Review – which is examining the remaining exemptions on conflicted remuneration, regulatory framework and other issues – expects to report to the Government by December.

The AFA cites past reforms that have failed to achieved the intended results. It says the Life Insurance Framework (LIF) capped upfront commissions on the premise that premiums would decline but that has not materialised.

“It was expected by the Government that the LIF reforms would lead to a reduction in premiums as the cost of commissions was materially reduced,” the AFA submission said.

“That has not been the case and in fact premiums have risen materially since the LIF reforms came into play.”

The AFA says it believes that any further changes should only be on the basis of evidence of misconduct and detrimental client outcomes in relation to whether other countervailing factors should be taken into consideration when deciding if the exemption on conflicted remuneration should be retained.

“We are not aware of any recent evidence with respect to this. Other than one or two examples, it was not a factor in the [Hayne] royal commission,” the AFA submission said.

The AFA says the regulatory regime needs to provide consumer protection measures that are proportionate to the risk faced, that apply to those who are appropriately licensed.

This has not been the case with the reforms that have been implemented, it says, leading to an exodus of advisers and hundreds of thousands of clients losing access to their adviser. Even for those who are willing to pay, it has been impossible to get financial advice.

“It is unfortunate that much of the recent reform has been excessive and ill-considered,” the AFA submission said. “The extent of industry restructuring has had a huge impact. In many ways the [Hayne] royal commission was the last straw that drove the exit of the large institutions.

“The virtually universal failure to do a Regulation Impact Statement (RIS) for all the [Hayne] royal commission reforms, under the misguided and erroneous claim that the royal commission was equivalent to an RIS, was at best laughable.”

The AFA submission lists 10 recommendations it believes will improve the financial advice landscape. These include removal of the Best Interests Duty safe harbour; retention of upfront life insurance commissions, but increased to 80% and a reduction in the year two clawback rate; greater flexibility in the use of Records of Advice; and the regulatory obligations for the provision of financial advice should be proportionate to the level of complexity and risk of client detriment.

The Financial Planning Association (FPA) says the industry and government need to “urgently” come together and immediately address the “quagmire” that has been created by complex, overlapping and contradictory regulations, codes and rules that now govern the provision of financial advice.

“Financial planners came into this profession to help Australians achieve their financial goals and have confidence in their future,” FPA CEO Sarah Abood said. “They did not bargain on spending more time generating paperwork and filling out forms than helping their clients.”

Ms Abood says the industry needs to move to a “simplified” regulatory regime that recognises the professional status of financial advisers and planners.

The FPA submission to the Quality of Advice review makes a key recommendation: the removal of Chapter 7 from the Corporations Act 2001 and the structure of the financial services law.

“We need to eliminate duplication between the registration and professional standards for financial planners, and the authorisation and other financial advice obligations in the Act,” Ms Abood said.

“The current financial advice affordability issues cannot be fixed by more band aid solutions.”

Click here for more from the AFA submission and here for the FPA submission.