Assistant Treasurer Josh Frydenberg yesterday announced a joint agreement on life insurance remuneration between the Financial Planning Association (FPA), the Association of Financial Advisers (AFA) and the Financial Services Council (FSC).
Under the terms of the package, the industry will transition from upfront commissions, which are as high as 130 per cent, to a hybrid- or level-commission model (or a fee-for-service model).
From 1 January 2016 upfront commissions will be capped at 80 per cent, then reduced to 70 per cent from 1 July 2017, and then finally settling at 60 per cent from 1 July 2018.
Where a hybrid model is adopted, ongoing commissions will be capped at 20 per cent from 1 January 2016. Volume-based payments will also be banned from 1 July 2016 (subject to grandfathering arrangements in line with FOFA) and new retention clawback provisions will commence from 1 January 2016.
The man who authored the eponymous industry review that led to the reforms, former APRA member John Trowbridge, said he was pleased with the initial three-year transition period.
"I will be a keen observer over the next three years of the industry’s implementation of the reforms announced today by the assistant treasurer," Mr Trowbridge said.
"The proposed review in 2018 will enable residual remuneration conflicts, quality of advice questions and industry effectiveness to be reassessed at that time and further reforms to be undertaken," he said.
The wealth management arms of the four big banks released statements welcoming the reforms, as did major insurers such as TAL and AIA.
FSC chief executive Sally Loane, whose organisation lobbies on behalf of the big wealth management firms, said the bringing together of the advice and life industries was a "ground-breaking approach".
"The package includes a new remuneration model, development of a code of conduct, more product choice through the broadening of approved product lists and a review of statements of advice," Ms Loane said.
"These reforms will be supported by a code of conduct, which the FSC is looking forward to developing in consultation with the community."
But the lobby group for the industry fund sector, Industry Super Australia (ISA), was less than impressed with the reforms – claiming they fell short of tackling "serious problems with life insurance commissions exposed by ASIC".
While Matthew Linden, ISA director of public affairs, said his organisation supported the proposal to ban volume rebates and put in place clawback provisions, he added:
"The proposals do not go far enough given the significant detriment to consumers identified by last year's ASIC report on life insurance, including that 37 per cent of advice provided was inappropriate for the client.
"The proposal leaves in place commissions as the dominant remuneration model in life insurance advice. While 60 per cent commissions are lower than current levels, they are still going to lead to biased advice and poor consumer outcomes," Mr Linden said.
