No tantrum from the life insurance sector appears disruptive enough to stop the actuaries at the consultancy firm Melville Jessup Weaver (MJW) from continuing to push for a crackdown on commissions.
Mark Weaver and David Chamberlain are backing the recommendations they’ve been slammed for making by some in the life insurance industry, in a submission they’ve just made to the government review of the Financial Advisers Act 2008 and the Financial Service Providers Act 2008.
They’re reiterating their calls for the Government to ban some types of commissions paid by life insurers to insurance brokers and financial advisers, and cap others.
They say commissions – often as high as 200% – present an inherent conflict of interest, preventing advisers’ from being completely objective.
Weaver and Chamberlain raised these points in a $200,000 report they were commissioned to do by the Financial Services Council (FSC) last year, ‘Review of Retail Life Insurance Advice – An opportunity for a new beginning’.
MJW: The industry’s shown it can’t fix its own problems
Published in November, the report sparked a number of life insurance companies, including AIA, Partners Life, Fidelity Life and Asteron Life, to resign their membership from the organisation.
The insurers criticised MJW for targeting them, while letting banks (which are also FSC members) off the hook by saying they should basically keep selling insurance the way they do.
Since then, the FSC’s chief executive position has been disestablished; its outgoing chief executive Peter Neilson saying:
“In an industry that is evolving in ways in which more and more people are basically in a niche, it’s becoming harder to get common ground on issues that cut across business models.”
It is against this backdrop Weaver and Chamberlain have gone so far in their submission to say the industry cannot address the issues around commissions on its own, so regulatory intervention is necessary.
“How to deliver a fair basis to remunerate organisations and individuals when selling a life insurance product is an important and complex question,” they say.
“It is clear that the life insurance industry is unable to bring about a solution to the conflict of interest issue on its own. The events after the publication of the MJW Report demonstrated this.”
MJW: Disclosure isn’t enough
Weaver and Chamberlain say, “The conflict of interest does not matter when the customer expects to be sold a product. We consider that a clear distinction must be made and can be made between a person selling a product and one who is providing independent advice.
“Consumers do not necessarily have to have a choice of product, what they do need to know is that the person they are dealing with is trying to sell them something. We prefer to refer to these people as product representatives.
“Remuneration disclosure, both of the adviser and the entity they work for, from the product provider is essential. We believe an effective form of disclosure will be to show a person the cost of a product if no commission was payable (a true nil commission premium).
“This will highlight the cost of the transaction to the consumer and encourage them to consider their available choices on how to proceed with their purchase of life insurance.”
Weaver and Chamberlain “remain unconvinced” disclosure on its own can adequately deal with the conflict of interest inherent in the industry’s remuneration structure, so something also has to be done about commissions.
“The activities of some advisers in the industry, brings the whole adviser industry into disrepute. To move forward, and for the reforms to be successful, the industry must be changed so as to build respect from the public,” they say.
Government: Disclosure may be enough
However the Government appears to have backed away from the possibility of banning commissions.
The FAA review Options Paper MJW has written its submission on, doesn’t include a ban of commissions in any of three proposed ‘packages’ of change put forward.
The Minister of Commerce and Consumer Affairs Paul Goldsmith also recently gave strong hints that he was against a ban on commissions.
The Ministry of Business, Innovation and Employment is currently processing the submissions it received on its Options Paper.
A final report, including any recommendations for changes arrived at after the Options Paper consultation process, will be provided to Goldsmith by July 1.
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