The Financial System Inquiry (FSI) has recommended life insurance upfront commissions be reduced to the same level as trails, to stop churning and improve the quality of advice.

The move would see upfront commissions of 100-130% replaced with commissions of about 10%. Advisers would still receive a trail of about 10%.

“The inquiry recommends a level commission structure, implemented through legislation, requiring that an upfront commission is not greater than the ongoing commission,” the FSI’s report says. “This would provide a balanced and cost-effective approach to better align the interests of advisers and consumers.”

The report is scathing in its assessment of life insurance advice, noting issues raised in the recent Australian Securities and Investments Commission industry review.

“In light of recent evidence, the inquiry is concerned about high upfront commissions for life insurance advisers,” it says.

“This has been a long-standing industry practice, reflecting that life insurance has higher arranging costs, such as managing the underwriting process, and that consumers are often not independently motivated to purchase life insurance.”

The report argues high commissions give advisers an incentive to make sales, rather than provide strategic advice.

“More than one-third of the personal advice reviewed failed to comply with the laws relating to appropriate advice and prioritising the needs of the consumer. Upfront commissions can affect the quality of advice.

“To date, industry approaches to address the issues in life insurance have not worked.”

The inquiry accepts life advisers’ remuneration models must be sustainable, to prevent them leaving the market.

“Alternative models of remuneration, such as delayed vesting of commissions and clawback arrangements, may simply delay the issue of churn and are complex.

“At this stage the inquiry does not recommend removing all commissions, because some consumers may not purchase life insurance if the advice involves an upfront fee.”

The report says if level commissions do not work, the Government should consider banning all commissions on life insurance sales.

“The inquiry has not determined the percentage amount of the level commissions that should apply in the life insurance sector. This should be left to the market and industry.”

The inquiry has also urged the Government to monitor grandfathering of life commissions and intervene if issues arise.

On a more positive note, it calls for the Financial Services Council and Association of Financial Advisers working group’s findings on life insurance to be considered when developing and implementing life adviser remuneration.