An “unacceptable” amount of life insurance advice to retail clients fails to meet legal standards, according to an Australian Securities and Investments Commission (ASIC) review.

The regulator surveyed 202 files from large, medium and small financial services licensees and found more than a third of their advice fell short on laws relating to appropriateness and prioritising client needs.

“This is an unacceptable level of failure and the life insurance industry is now on notice to lift standards and professionalism,” ASIC Deputy Chairman Peter Kell said.

He says the regulator is working through follow-up investigations and regulatory actions related to the failures.

Advice regarded as compliant also varied widely in standard, ranging from clearly meeting client needs to barely passing the legal threshold, the report shows.

ASIC warns against the insurer and advisory sides of the industry blaming each other for the shortcomings. “That has occurred too often in the past,” Mr Kell said.

“The industry as a whole needs to consider how remuneration and compliance practices can better support good-quality outcomes for consumers.”

The Association of Financial Advisers and the Financial Services Council (FSC) say they will convene a working group, led by an independent chairman, to produce an initial report in two months and a final report early next year.

“The financial advice and life insurance sectors will work together to carefully examine the findings and recommendations in the ASIC report and to assess all options to improve market practices and sustainability,” FSC CEO John Brogden said.

ASIC does not make recommendations on remuneration structures, but says the compliance pass rate was only 55% when advisers were paid upfront commissions.

The report says high lapse rates were driven by incentives to write new business or rewrite previous business to lift commissions, plus product changes that lead to policy repricing and age-based premium increases.

Consumer Action Law Centre Senior Policy Officer David Leermakers says it would be unacceptable in any industry for one-third of jobs to fall short of legal standards.

“I don’t see why any consumer after reading this report would want to go to an adviser now to buy life insurance,” he told insuranceNEWS.com.au. “We don’t see any reason why upfront commissions just shouldn’t be banned.

“They just seem to be completely inconsistent with the role of an adviser in this circumstance.”