Australia: The changing face of conflicted remuneration and its impact on life insurance commissions

Last Updated: 21 December 2015
Article by Adeline Hiew and Timothy Whiting

Most Read Contributor in Australia, September 2017

The Commonwealth Government have released an exposure draft of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2015 (Bill). This follows on from:

  • the Australian Securities and Investments Commission Report 413 – Review of retail life insurance advice – which included a recommendation to review the remuneration practices in the life insurance industry; and
  • the alternate remuneration models proposed by the Financial System Inquiry Final Report and the Trowbridge Review

The Bill amends the Corporations Act 2001 (Cth) (Corporations Act). If successfully passed, it will change the way in which Australian financial services licensees (Licensees), and their respective representatives (Representative), are remunerated by life insurers with respect to life risk insurance products.

The exemption

Under the Corporations Act's current approach to conflicted remuneration, a monetary benefit (such as a commission) may be given to a Licensee or Representative, if it is solely in relation to a retail client's acquisition of a life risk insurance product (such as life insurance, total and permanent disability cover and trauma cover), provided it is not:

  • a group life policy for superannuation fund members; or
  • a life policy for a member of a default superannuation fund.

However, the Bill is looking to change this.

What's changing?

While the above conflicted remuneration exemption for life risk insurance products will (to a large extent) remain, the Bill will make it more difficult for Licensees and Representatives to receive benefits in relation to these products by adding further limbs to the current exemption.

Specifically, under the Bill, a benefit will now also have to satisfy one of the following before it can be given to a Licensee or Representative:

  • the benefit and relevant amount ratio – which requires the ratio between the benefit and the "relevant amount" 1 payable for the product/s to which the benefit relates, to be the same for the year in which the product/s is issued, as it is for each year in which the product/s is renewed; or
  • the benefit ratio and clawback requirements – unlike the above requirement, before it is given to a Licensee or Representative the benefit must satisfy two tests:
    • benefit ratio requirements – which requires the ratio between the benefit and the "relevant amount" payable for the product/s, or that part of the "relevant amount" payable for the product/s which relates to the benefit, for the period to which the benefit relates to be equal to or less than an 'acceptable ratio' – which will be determined by ASIC; and
    • clawback requirements – which requires the arrangement (i.e. between an insurer and Licensee), under which the benefit is payable to the Licensee or Representative, to include an obligation to repay all or part of the benefit if the product (or one of the products) is cancelled or not renewed 2, or the "relevant amount" for the product (or one of the products) is reduced 3, within two years after it is first issued to a retail client and the amount that is to be repaid under the obligation is equal to or greater than an 'acceptable repayment' – which will also be determined by ASIC.

When will it apply?

At this stage, the Bill states that the changes will apply to a benefit given to a Licensee or Representative under an arrangement entered into on or after 1 July 2016. However, the changes will also apply to any arrangements entered into before 1 July 2016, provided the life risk insurance product is issued after 1 July 2016.

What next?

The Bill and the explanatory memorandum are currently open for consultation, with the closing date for submissions from interested parties being Monday 4 January 2016.


1Under the Bill "relevant amount" for a life risk insurance product, or products, for a period is the sum of: the premiums payable for the product (or products) for that period, any fees payable for the issue of the product (or products) for that period, any additional fees payable because the premium for the product (or products) is paid periodically rather than in a lump sum, and any other prescribed amount. However, it does not include any taxes imposed by the Commonwealth, or a State or Territory, in respect of the product (or products).

2 Other than because of suicide, self-harm or in other prescribed circumstances.

3 Other than in prescribed circumstances.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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Timothy Whiting
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