ASIC Report into Retail Life Insurance Advice

Posted by Nicholas Hatherly on 12 December 2014

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Recently the Australian Investments and Security Commission (ASIC), the regulator of the financial services market, produced a “targeted” review of the retail life insurance advice sector. Whilst the whole industry may suffer a decline in the level of consumer confidence from the findings, I saw the headline and immediately saw how well this positions AFRM and our advice process. It confirms risk advice is a highly specialised area and the best advice is provided by specialists like AFRM.

The major issues found in the report are outlined below. We found that they differ markedly to AFRM’s business profile as we expected they would. Some of the points contain industry jargon so I have provided explanations of terms used for reference below.

Highlights of the ASIC Report

- 37% of the 200 files audited by ASIC were deemed to have contained faulty advice1. 37% is a very large number, however this must be tempered with the fact that this was a “targeted” review by ASIC, which essentially means they were looking for issues amongst a particular group that was audited (note - AFRM was not one of the groups audited).

- ASIC indicated that a lot of the faulty advice related to advisers failing to identifying the needs of the client or putting their interests first by replacing policies with no significant benefit for the client.

- 80% of the advice tested was written on Upfront2 commissions with 20% on other models (i.e. Hybrid3, Level4 or no commission).

- 96% of the advice that was deemed to be “faulty” was written on Upfront.

- Of the 20% of files reviewed on other remuneration models, 93% of advice was deemed to be compliant with only 7% deemed non-compliant (i.e. 3 files out of 40 on Hybrid)

- The report specifically states that Upfront2 commissions are statistically significant in clients receiving non-compliant advice. The flip-side to that statement is that Hybrid or other types of remuneration is therefore a very good indicator for compliant advice.

As mentioned this was a targeted report which aimed at highlighting unsustainable and potentially dishonest practices within the industry resulting in conflicts of interest .

How AFRM Differs

With regard to AFRM practice, our policy has been to only use hybrid brokerage (excluding a few exceptions) and has been for over 10 years. Hybrid commissions were confirmed in the report as being significantly more likely to be compliant advice. Hybrid incentivises our advisers to recommend policies to clients that are sustainable and can meet the needs of the client for the longer term. We can then provide a good ongoing review and administration service as well as our excellent Claims Care Service (should it ever be needed).

Other points to note about AFRM are that we have a very robust compliance culture and advice process. We are proud that our 2013 audit resulted in an “A” Compliance rating for our License.

Our Positioning

Thinking back to the positioning I mentioned earlier, whilst we acknowledge there are problems in our industry, we are specialists that provide great quality risk advice. We have very experienced staff and market leading advice standards. Our compliance processes and management systems are very robust. All that makes us leaders in our field. Our business has been modelled on strategic relationships with Accounting and Financial Planning practices that have recognised the difficulty of exceling in every area of financial advice and understood the value of outsourcing this specialist advice to AFRM. It has ensured quality risk advice for their clients.

I’ve told our staff to continue to do what we do best, maintain our high standard of professionalism and continue to differentiate ourselves from the poor advice practices highlighted from the ASIC review.

Looking past the report and into the future

Since the ASIC review has come out, a Financial System Inquiry has made 44 recommendations to government based on its investigations across the wider financial services industry. The biggest ramification for risk advice is the recommendation to ban Upfront commissions. This will affect small, non-bank aligned, advisers in that they may not be able to survive the earlier years of their existence from a cash flow perspective (or the may need to charge clients a fee on top of the premiums they already pay).

Staff, systems, processes and adherence to the compliance requirements of legislation are costly. Those who do not have the cash flow to survive will likely merge into the big Dealer Groups or find refuge in the banking sector where traditionally product recommendations have been aligned with the banks product.

AFRM has been operating for many years under a model of Hybrid commissions and we have the advantage of running our own License which allows us greater control and flexibility. We are therefore very well placed to deal with any significant changes in the market and our operations will not be stalled from any legislative of industry forced changes in the future. You can therefore be confident that you will have access to specialist risk advice and an excellent Claims Care Service for many years to come.


1 Faulty advice - product recommendations were not in the client’s best interest or didn’t meet the minimum legal requirements of providing advice.

2 Upfront Commission – typically a rate of up to 110% (excl GST) of the first year premium for the advice given and implementation of a policy which is paid by the insurer. After the first year a rate of 10% (excl GST) applies to the ongoing premium each year for managing the policy on behalf of the client.

3 Hybrid Commission – typically a rate of up to 75-80% (excl GST) of the first year premium for the advice given implementation of a policy which is paid by the insurer. After the first year a rate of 20% (excl GST) applies to the ongoing premium each year for managing the policy on behalf of the client.

4 Level Commission - typically a rate of around 30% (excl GST) of the first year premium for the advice given implementation of a policy which is paid by the insurer and 30% of the ongoing premium each year for managing the policy on behalf of the client.

5 Lapse rate – the proportion of premium that discontinues due to the cancellation of policies compared to all policies an adviser manages. When this is high and particularly when this happens within the first three years of the policy being in force it generally suggests a warning that poor advice may exist.