Life insurance advisers will face clawback clauses under the final Life Insurance Framework announced by the Federal Government on Friday evening.

The clawback period has been reduced to two years, but the only exclusion is when the policyholder commits suicide or self-harm.

If the policy lapses or the premium decreases in the first year, an adviser will have to repay 100% of the commission. In the second year, this drops to 60%.

The framework will also mean commissions reduce over a three-year period from next July 1.

On that date upfront commissions will be set at 80% of the premium in the first year of the policy. This will drop to 70% in 2017 and 60% from July 1 2018.

Trails will be set at 20% of the premium from July 1 next year.

The new legislation will also ban volume payments for life insurance.

Other changes include putting commission details at the forefront of statements of advice and the Financial Services Council developing a life insurance code of conduct. 

Assistant Treasurer Kelly O’Dwyer says if there is no improvement in quality of advice under the framework, the Government will mandate level commissions.

“We will ensure the industry develops appropriate lapse reporting data to provide clear evidence for this review and the Australian Securities and Investments Commission (ASIC) works with industry to ensure strong integrity around the data,” she said.

“I will shortly write to ASIC requesting that it undertake this review.”

Life insurers must submit lapse data to ASIC from July 1.

Legislation to implement the changes will be introduced to Parliament this year under an amendment to the Corporations Act.

It will give ASIC the power to cap commissions and implement the clawback arrangements.

The regulator will release its legislative instrument covering these changes at the same time.