The Federal Government has introduced to Parliament legislation restricting life insurance commissions from July 1.

The reforms are the same as those outlined in a Treasury paper released late last year.

The Government says implementing the reforms will cost insurers and advisers $27.8 million a year, and it has confirmed the Financial Services Council (FSC) will be responsible for creating the Life Insurance Code of Conduct.

The reform represents “the most significant improvements to the remuneration arrangements in the life insurance advice sector since the Wallis inquiry recommendations were implemented in 2001”, Assistant Treasurer Kelly O’Dwyer said.

“Consumers will benefit through improved quality of advice as a result of better alignment of interests, more product choice and enhanced competition,” she said when introducing the legislation to the House of Representatives.

“Upfront commissions, which provide an incentive for advisers to replace or ‘churn’ policies where there is no consumer benefit, will be significantly scaled down.”

Ms O’Dwyer says 82% of advisers selling life cover rely on commissions, and upfront payments of 110% are not uncommon. The payments will be scaled back to 60% by 2018.

“By reducing the incentive to churn clients through products, the new commission structure will provide a better basis for advisers to give advice that is more appropriate to consumer needs,” she said.

“Commissions will be calculated on the total of the product premium, the product fee and frequency loading – the extra amounts charged to make payments on a monthly basis rather than annually.”

Ms O’Dwyer has praised the Association of Financial Advisers, the Financial Planning Association and the FSC for “working together to achieve sensible reforms for the sector, which will benefit consumers through the provision of more appropriate advice and the long-term sustainability of the industry”. 

The legislation will face further debate before moving to the Senate. Both houses sit again next week.