The exemption to the ban on conflicted remuneration for life risk insurance products should stay, the Financial Services Council (FSC) says in a detailed submission explaining why the current commission-based model helps consumers.

FSC says the exemption was introduced to ensure consumers can access affordable advice on life insurance and therefore the cost of receiving that advice would not be a barrier to uptake of life insurance.

The exemption has had bipartisan support since the Future of Financial Advice reforms in 2013, according to the FSC submission.

“As life insurance is a product that is needed when personal tragedy occurs, in most cases it is not a product that is front and centre of a consumer when seeking advice on their financial needs,” the submission says.

“If a consumer receiving advice is asked to pay an additional up-front fee for receiving specialist risk advice, it would result in considerably less insurance being distributed through advisers due to affordability and therefore contribute to underinsurance levels that currently exist in Australia.”

FSC says a commission model aligns consumers with advisers in a more “efficient and cost effective” manner as the adviser is only remunerated when the adviser is able to successfully place the consumer in a product that’s right for them.

“If advisers were remunerated under a fee for service model, the customer would be required to pay a significant upfront fee to the adviser for advice on a product they may not receive, due to underwriting, which would be a disincentive for consumers to request and pay for life risk advice,” the submission says.

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.

FSC in its submission also released the findings of a survey it commissioned NMG Consulting to undertake in relation to the Life Insurance Framework (LIF) reforms that commenced in 2018. Under LIF, upfront commission rates have been gradually capped and are now limited to 60% of the premium in the first year of a policy.

The submission says LIF, along with other advice, compliance, code and education measures introduced, has significantly improved the quality of advice by decreasing “churn” and reducing lapse clawback rates, thus aligning the interests of advisers with consumers and therefore improving consumer outcomes.

FSC says retaining the exemption is also key to the future of the adviser profession, which has seen an exodus due to increased regulatory pressure.

“If the current structure for remunerating advisers was abolished... there would be a further reduction in the number of advisers providing specialist risk advice to consumers and therefore decrease the accessibility and affordability for consumers,” the submission says.

Click here to access the submission.