More than a third of life advice deemed non-compliant

Less than two-thirds of life insurance advice complies with legal requirements, according a wide-ranging surveillance operation.

This morning, ASIC released the fruit of a year-long investigation into 202 randomly selected advice files from a variety of licensees, finding that 37% of the advice consumers received failed to comply with the laws relating to appropriate advice and prioritising the needs of the client.

In one case, a client who sought advice to help reduce the premium he paid was instead signed on to a new policy with a premium more than five times higher.

ASIC Deputy Commissioner Peter Kell says the report reveals an unacceptable level of failure.

“The life insurance industry is now on notice to lift standards and professionalism,” he says.

“Both insurers and advice firms need to work on delivering a consistently better service for consumers.”

The report places much blame for poor-quality advice on the upfront commission structures. When advisers were paid under an upfront commission model, the compliance-failure rate was 45%. Where the adviser was paid under another commission structure, the failure rate was just 7%.

Kell says he wants to see the problems addressed through industry efforts rather than legislation but warned that close surveillance of the industry would be continuing.

Although recent efforts to foster an industry-wide response to these issues have not been successful, Kell says an industry-led response is the best path forward.

“If industry do not show some initiative here, then there will be further enforcement and regulatory action, and further reputational damage,” he says. “I think that industry leaders understand that is unsustainable so I think this will provide an incentive to work on some better outcomes.”

Kell stopped short of demanding an end to large upfront commissions, saying instead that “the ball is in the industry’s court”.

For insurers, ASIC recommends that they:

  • address misaligned incentives in their distribution channels
  • address lapse rates on an industry-wide and insurer-by-insurer basis (eg by considering measures to encourage product retention)
  • review their remuneration arrangements to ensure that they support good-quality outcomes for consumers and better manage the conflicts of interest within those arrangements.

ASIC also recommends that the advice industry:

  • ensure that remuneration structures support good-quality advice that prioritises the needs of the client
  • review their business models to provide incentives for strategic life insurance advice
  • review the training and competency of advisers giving life insurance advice
  • increase their monitoring and supervision of advisers with a view to building ‘warning signs’ into file reviews and create incentives to reward quality, compliant advice.