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Life insurance reform. Are we there yet? No.

We are grateful to Jim Boynton & Rohan Cush of leading law firm King & Wood Mallesons for their permission to use this article.

The passing of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2017 (Bill) marks another milestone for one aspect of a wide range of ongoing reforms in the Australian life insurance sector.

Life insurance remuneration reforms

Almost 12 months since the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 was first introduced into Parliament, the Senate passed the Bill on 9 February 2017.

At a high level, the Bill aims to improve the quality of advice in the sale of life insurance by removing the current life insurance risk product exemptions from the FoFA conflicted remuneration ban, including new more limited exemptions and limiting the amount of upfront commissions that financial advice providers may accept and retain. The reforms below will commence on 1 January 2018 and currently do not have the benefit of transitional grandfathering arrangements:

  • upfront commissions paid to advisers will be phased down over two years to a maximum of 60% from 1 January 2020;
  • a 20% cap for trail commissions from 1 January 2018; and
  • commencement of a two year commission ‘clawback’ period on 1 January 2018 for policy lapses, which requires clawbacks of 100% of an upfront commission in the first year and 60% of an upfront commission in the second year.

The Bill went through a couple of iterations. The core amendments have remained substantially the same since the initial bill was introduced to Parliament in early 2016. For further detail regarding the Bill and its development, please see our previous alerts below:

Regulations together with legislative instruments by ASIC will provide additional detail in relation to these reforms going forward.

More to come…

The life insurance remuneration reforms are but one part of a much larger reform process covering the life insurance and broader financial services industries. In particular:

  • Product design and intervention: ASIC is also currently in the process of formal consultations regarding other reforms recommended by the FSI, including proposed obligations for product issuers and distributors in relation to the design and distribution of financial product and product intervention powers for ASIC. Further detail regarding these proposed reforms is set out in our December 2016 alert, which can be accessed here.
  • Insurance claims: Claims data and outcomes are proposed to be made public and potentially there will be more significant penalties for misconduct in relation to claims practices. APRA has also written to life insurers setting out its expectations for improvements to the oversight and handling of insurance claims. ASIC and APRA have both indicated that they will continue investigations in this regard. For further detail, please see our October 2016 alert here.
  • Other possible reforms: In its January 2017 submission (Submission) to the Inquiry into the Life Insurance Industry, ASIC suggested a number of legislative reforms that would assist ASIC to take action in relation to, and improve oversight of the life insurance sector (and possibly the managed investments sector) including:
    • removing the exclusion relating to claims handling from the definition of a financial service under the Corporations Act, to enhance ASIC’s capacity to seek improvements in insurers’ claims handling practices;
    • strengthening ASIC’s enforcement regime, which could, for example, enable ASIC to seek civil penalties where insurers have breached the duty of utmost good faith;
    • introducing amendments so that insurance contracts are no longer excluded from unfair contract terms provisions; and
    • facilitating rationalisation of legacy products in the life insurance and managed investments sectors.
  • Direct insurance review and surveillance: ASIC also announced in its Submission that additional Government funding granted to ASIC will enable it to undertake additional surveillance and industry reviews of the life insurance sector.
  • Code of Practice: FSC members must comply with the Life Insurance Code of Practice (Code) by 1 July 2017. The Government expects the FSC and life insurance industry to take the necessary steps to ensure that the Code is enforceable across the whole industry, by gaining ASIC’s approval of the Code. For further detail, please see our October 2016 alert here.
  • Insurance in Superannuation Code of Practice? An industry group was established late in 2016 with a view to putting in place a superannuation equivalent of the life Code of Practice before the end of 2017. Superannuation specific issues expected to be covered are insurance premiums eroding account balances, multiple insurance covers, insurance for young members, distortions arising from member choice of fund, standard policy definitions and expedition of claims handling.
  • Professional standards for financial advisers: In addition to the passing of the Bill in February 2017, the Senate has also passed the Corporations Amendment (Professional Standards for Financial Advisers) Bill 2016, which aims to raise the professional and education requirements for financial advisers. These will be overseen by a new Commonwealth standard setting body. This body will also create a uniform Code of Ethics, expected to commence on 1 January 2020.
  • Parliamentary review of the four major banks: The First Parliamentary report on the Four Major Banks was published in November 2016. Many of the recommendations could impact life insurers, including recommending:
    • the establishment of a Banking and Financial Sector Tribunal by 1 July 2017;
    • public reporting by AFS licensees of significant breaches of AFS licence obligations;
    • various measures to improve competition and transparency, particularly in the banking sector; and
    • measures aimed at enhancing bank identification of, and responses to, misconduct and monitoring internal dispute resolution compliance.
  • Continued focus: In addition to the above, further reviews that will impact the life insurance sector are also underway, including:
    • a new Senate Economics References Committee Inquiry into consumer protection in the banking insurance and financial sector - Submissions to this inquiry close on 7 March 2017. Life insurers could be summoned to Parliament to explain their position to the committee;
    • the Joint Parliamentary Committee on Corporations and Financial Services into the life insurance industry. The PJC is due to report on 30 June 2017;
    • the Productivity Commission into superannuation, which will consider the competition and efficiency of having insurance within superannuation; and
    • calls for a banking royal commission or inquiry, which would impact life insurance, also continue.

In short, financial service providers and life insurance companies will need to keep up with numerous regulatory developments on multiple fronts. Many of these reforms are progressing quickly, and industry players will need to regularly monitor these developments in light of their current businesses.

M&A activity

We are continuing to see the highest level of M&A activity and interest in the Australian life insurance industry for years. Potential sellers should continue to assess divestment opportunities in light of these ongoing reforms. Prospective buyers should also familiarise themselves with the upcoming reforms - Australian life insurance businesses continue to be strong, highly competitive brands that offer a platform for investment in a developed and prosperous market on Asia’s doorstep.

If you have any questions or require further detail in relation to life insurance regulatory reforms or M&A, get in touch with your usual KWM contact.

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