The Life Insurance Advice Working Group (LIAWG) released the Review of Retail Life Insurance Final Report (known as the Trowbridge Report) on 26 March 2015.
LIAWG was established by the Association of Financial Advisers (the AFA) and the Financial Services Council (the FSC), and was independently chaired by John Trowbridge. The Report was prompted by ASIC's Report 413: Review of retail life insurance advice, released in October 2014.
The Report recommends the life insurance and financial advice sectors adopt reforms across 3 broad areas.
Addressing misaligned incentives
The Report expresses concern regarding the inherent conflicts that arise under existing remuneration arrangements between advisers/ licensees and clients, particularly in relation to replacement product advice and 'churning'.
To address remuneration issues, the Report recommends the adoption of what it calls the Reform Model, which caps level commissions at a maximum 20% of annual premiums and also includes an Initial Advice Fee set at a maximum of $1,200. The Initial Advice Fee is paid by an insurer to an adviser when a client first takes out a new policy and cannot be paid for a further 5 years, even if that adviser recommends a replacement policy.
A 3 year transitional period is proposed for the adoption of the Reform Model.
The Report also recommends a ban on licensees receiving any benefits from insurers that might influence the advice provided.
Quality of Advice
The Report comments on the use of overly restrictive Approved Product Lists by some licensees, impeding an adviser's ability to satisfy their best interests duty. To address this issue and increase access to more competitive life insurance products, the Report recommends that all licensees include at least half of authorised retail life insurers on their Approved Product Lists.
The Report also notes the importance of clients being provided with good quality life insurance advice that ensures the clients are sufficiently engaged in the advice process and receive advice that enables them to make informed decisions.
To improve the quality of advice, the Report recommends that the life insurance advice industry, in consultation with ASIC and relevant stakeholders, develop a best practice advice process. The Report considers this should include:
- enhanced adviser training and education
- high standards of client engagement and education
- shorter SOAs
- clearer regulatory guidance from ASIC
Insurer Practices
The Report comments that the codes of practice in force within the banking and general insurance industries have contributed to discipline and fairness amongst product providers and been favourable for consumers. The Report recommends the development of a Life Insurance Code of Practice, modelled on the General Insurance Code of Practice, aimed at setting best practice standards for life insurers, licensees and advisers.
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