The Australian Securities and Investments Commission (ASIC) has expressed concern advisers are directing most of their life insurance business into just three providers.

In its review of the top 20 financial services licensees, the commission has found 80% of life insurance business in 2009 went to the top three unnamed product providers. This was up from 75% in 2008.

ASIC says the concentration of business into just three providers creates a “significant concentration risk”.

“Failure in one product could be very serious for the licensee, as well as the clients,” it said in the review.

The regulator finds the top three providers paid 37% of all ongoing fees to the licensees and 43% of all up-front commissions.

The review also looks at adviser remuneration. This could be of concern to advisers with the second tranche of the Future of Financial Advice legislation looming.

According to the review 53% of advisers were paid $1.1 billion in ongoing commissions in 2008, but this dropped to $1 billion in 2009.

Up-front commissions saw 28% of advisers receiving $600 million in 2008, dropping to $550 million.

Volume rebates were received by 6% of the advisers totalling about $125 million in 2008, dropping to just over $100 million in 2009.

The low figure for volume payments can be explained by dealer groups not passing them on to the individual adviser.

ASIC says product providers paid less than 1% to advisers for shelf, referral and marketing fees as well as soft-dollar payments.

Again many of these payments are made to the dealer group rather than the individual adviser.

The review also says the fee-for-service model of remuneration is not popular with advisers, with 5% using the method to charge clients for advice. In 2008 and 2009, this generated about $100 million in fees.

Some licensees taking part in the review say they have approved products that are exclusive to them.

ASIC says this creates a conflict of interest when advisers recommend these products, especially when there is a higher payment scale for advisers using them.

“Where conflicts of interest are prevalent in business models, there is more likelihood of poor or deficient advice being generated,” the regulator said.

“We expect to see licensees implement processes and controls that address these risks and that are seen to be effective and fully supported by advisers.”