The Federal Government’s opt-in proposals could have serious implications for clients with life insurance policies, the Association of Financial Advisers (AFA) has warned.

Speaking to the Parliamentary Joint Committee on Corporations and Financial Services public hearing on the Future of Financial Advice (FOFA) bills, AFA CEO Richard Klipin said the proposals are against the interests of the consumer.

“Except for those [consumers] who actually respond and get their opt-in notice back, the rest have effectively opted out,” he told the committee.

“If somebody opts out, then they are effectively outside the advice relationship, especially when you have an insurance contract and something medical is changed.”

Mr Klipin says if the client is outside the advice relationship when something happens, the legal ramifications will result in the matter ending up in court.

“When we talk about the vague and opaque nature [of the FOFA legislation] and you play that circumstance out, it is not in the consumer’s interest and certainly ties up advice practices in cost and time,” he said.

The hearings also heard why commissions should be retained for some life insurance products that are sold within superannuation.

Financial Services Council (FSC) CEO John Brogden told the hearing that directly advised life insurance within superannuation is the real issue that has to be dealt with before FOFA becomes law.

The FSC supports the ban on commissions in a default superannuation fund, as the member has not make any choices about the services they use.

“We are referring to the people covered presently in the default arrangement but who believe the level of life cover is inadequate,” he told the hearing.

“They want to top up their cover, and for those individuals that move into directly personally advised relationships… there should be the ability for them to have their advisers remunerated via commission.”

Corporate Super Specialist Alliance President Doug Latto told the hearing the proposed ban on commissions in group insurance would stop advisers charging a fee for their service.

“It will mean we will be forced to withdraw our services,” he said. “This will not benefit anybody and would not lead to a reduction in costs.”

Mr Latto says the insurance companies will not step in if this happens. With the underinsurance problem in Australia, matters can only become worse.

“An unlevel playing field could also see people being advised to hold insurance in retail policies that allow a commission payment,” he said.

“Retail insurance is often very much more expensive than group insurance and is possibly therefore not as beneficial for the client.”

Mr Latto wants commissions to be retained or alternatively advisers to be able to charge an “explicit and transparent” fee for the service provided to super funds.

Association of Superannuation Funds of Australia CEO Pauline Vamos told the hearing commissions on life insurance should be banned.

When asked if she meant a complete ban, Ms Vamos replied: “Flat out, even when there is advice involved.”