Fees or commissions? It’s a debate that’s been rumbling for a while. IRP runs through the latest developments.
There has been much debate concerning the fees versus commissions issue, and NIBA has been instrumental in lobbying the Government about its members’ position on the matter. Specifically, NIBA has participated in the FOFA advisory group meetings in which Treasury has been seeking feedback from key consumer and industry representatives as well as ASIC on whether the reforms should be extended to Risk and Life products.
The Chief Executive of NIBA, Noel Pettersen, and the Association’s legal adviser, Mark Radford, have been representing NIBA at these talks.Pettersen says that there are strong arguments against any extension of the ban, and these have been presented by NIBA to the FOFA Advisory group and generally accepted. These include:
There are no problems of the samewww.niba.com.aunature identified by the parliamentary joint committee in regarding remuneration or advice that would justify similar changes to the Risk Insurance industry. Risk Insurance productsare short term and generally renewed annually, and the risk for consumers is significantly less than that of an investment product. The remuneration arrangements are also less complex than that of investment advisers.
In particular recent reviews, ASIC did not identify any such problems, and there is a clear lack of complaints made to the Financial Ombudsman Service in relation to insurance brokers generally and concerning such matters. This shows that the current regulatory regime governing brokers (including the obligation to have adequate procedures in place to manage conflicts of interest) is working.
There is no worldwide push for such an initiative in equivalent jurisdictions, which recognise the real differences between the risk and investment markets.
The detriment of such changes will clearly outweigh any benefits for consumers and would result in reduced availability of personal advice, increased cost of advice to consumers, reduced competition in the market regarding insurance terms and an increase in under/non insurance (already a significant issue).
There is also no viable alternative model that would practically work. Unlike investment advisers, insurance brokers cannot receive remuneration based on funds under management, and consumers are unlikely to want to pay for the additional services that insurance brokers provide automatically to all clients as part of the brokerage received.
Radford cites what’s happening in foreign jurisdictions. “After detailed recent reviews, countries such as the UK haven’t applied any ban on insurance brokerage,” he says. “The regulators, after undertaking a proper analysis, understood that the model works for the insurance industry and to change would have significant negative impacts on consumers and the market.
”He adds consumers tend to view insurance as a grudge purchase but when they buy investment products they do it to increase their wealth. “There are different rationales and thought processes behind each, and this is significant if it comes to a consumer deciding whether to pay on a fee/time cost basis or not.
”Radford says with the current broker model of charging brokerage, brokers only get paid if the deal gets done.“Brokerage also covers services such as claims settlement assistance, which would be extremely time consuming and costly if charged on a time-costs basis,” he says.
Talks are continuing
Meanwhile, Pettersen says, “NIBA will continue to liaise with Treasury on the issue and believes that once those involved understand the real issues and potential negative impact, there is unlikely to be any push for a ban.
”The Minister for Financial Services and Superannuation, Bill Shorten, is expected to make a decision by April this year. At the Insurance Council of Australia’s Regulatory Update seminar on 9 March 2011, Liberal senator and spokesman for Financial Services, Mathias Cormann, noted that any proposed ban on risk insurance commission remuneration could have a ‘bad’ impact, such as an increase in underinsurance.
Meanwhile, Andrew Sharpe, partner with DLA Phillips Fox, says there are two aspects to the issue of commissions versus fees. The first, he says, is the government regulatory aspect where it has banned commissions from July 2012 for financial planners but has exempted risk products. However, it has promised it will continue to look at risk areas and may still decide to ban commissions for Life and General Insurance.
“This is clearly perceived as a threat to the industry, which will continue to lobby against it,” Sharpe says. “The cost-benefit equation is fundamentally different in relation to risk products because of the significant public benefit of ensuring adequate levels of insurance An efficient system of distribution, which enhances the consumer’s understanding of risk, is essential to community welfare.
Unfortunately, it is only after a disaster, such as the recent Queensland floods,that people outside the industry focus on the importance of insurance.
”The other aspect concerns what is likely to happen as a result of market forces – and this is where consumers come in. Sharpe explains that within the insurance market there has been an increase in competition from direct insurers, particularly at the smaller end. “Commissions align remuneration with transactional volumes,” he says. “As the direct market strips out transaction costs and develops a range of alternative distribution models, the proportion of broker fees allocatable to the transactional, or sales, function will fall.”
He says the challenge for brokers will be to demonstrate a clear value proposition. “This will be essential for brokers to be able to substantiate explicit fees to augment what I expect to be declining commission rates in keeping with lower transactional costs.”
Brokers are resistant to a move away from commissions.
Demonstrating value
The main issue with commissions is that there is no direct link between them and the value to the business. Therefore there will be increasing moves by consumers and small-to-medium businesses to see brokers demonstrate that value link.
Sharpe believes there is likely to be pressure on brokers to move away from commissions for their remuneration, although they will always play a part in the pricing structure.
“I think brokers are resistant to a move away from commissions and there is a real feeling that if this happens, consumers are not going to be able to recognise the value they are getting,” he says.
“Brokers feel this will result in lower levels of serviceif a fee needs to be charged as the customer won’t recognise the value if asked to pay a fee rather than a commission.
”Sharpe says this is a challenge for the industry and his discussions with brokers highlight that most feel education of the customer around recognition of value is not there.
“My message to brokers is that, over the medium term, the market will need to move away from commissions towards a more balanced approach,” he says. “Work needs tobe done now to improve transactional efficiency and to sell the broker’s value proposition, in terms of advice and optimisation of cover, so that when the time comes, brokers are better placed to introduce feesfor service as part of their overall remuneration structure.”
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