A Liberal backbencher has spoken out against the Federal Government’s Life Insurance Framework legislation.

Bert van Manen told the House of Representatives last week any debate on reforming the industry should be based on proper analysis, especially considering churn.

“It is important to understand in this debate what ‘churn’ is and is not,” he said.

“Life insurance policy churn occurs when an adviser moves customers between different insurers without any benefit to the client. That, simply, is what churn is.”

Mr van Manen says the Australian Securities and Investments Commission’s (ASIC) report on the life insurance industry did not properly address churn.

“The 2014 ASIC report failed to properly identify what percentage of policy lapses occurred as a result of this activity by advisers, and consequently made the incorrect conclusion that an increase in lapse rates equated to an increased level of churn,” he said.

“This is at best sloppy analysis, and at worst a deliberate attempt to misrepresent the data to obtain a predetermined outcome.”

Mr van Manen says advisers are often obliged to change a client’s policy to meet the best-interests duty in the Future of Financial Advice Act.

“Clients are demanding that advisers look at better options.”

Advisers will work to maintain a policy by negotiating reduced cover and premiums, especially if a client’s needs and circumstances change, he says.

“This reduction in premium is counted as a lapse. Yet business was saved and the cost is incurred by the adviser assisting in this administration.”

Mr van Manen says the winners under the legislation are insurers with aligned distribution and a direct presence.

“The product manufacturers will retain profits to distribute to shareholders and have no obligation to pass these savings on to consumers. However, there will be significant collateral damage. We risk losing our independent financial advisers as a result of this bill.

“The solution to this is not to reduce commission or increase clawback to align adviser behaviour, but rather to focus on the true causes of poor advice.”

Labor will support the legislation, but has warned it will consider further changes if it wins power.

Shadow Minister for Financial Services Jim Chalmers told the house the party has reservations about the legislation.

“One concern is with the clawback provisions in the final package. We do not want to see financial advisers pressure customers to unnecessarily change their life insurance policy after two years as a result of these changes.”

Mr Chalmers says another concern is the way commissions are calculated.

“The exposure draft legislation… excluded stamp duty and government taxes from the calculation of permitted commissions payable to advisers,” he said.

“But this explicit exclusion was removed from the bill presented to Parliament, leaving details of the calculation to the accompanying regulations, which we still have not seen.

“This could become the first time that a commission may be paid on government taxes and stamp duty, which could be a very troubling thing.”

Mr Chalmers says Labor wants the regulations that will accompany the bill to either exclude stamp duty and government taxes from the calculation of commissions or set out a timetable for achieving this.

“Despite these concerns, Labor does support the passage of this legislation that will make incremental improvement to the life insurance remuneration structures. But we must use these changes as an opportunity to consider the industry more widely.”