New legislation introduced into Parliament will remove
the life insurance exemption from the ban on conflicted
remuneration and instead substitute new "benefit ratio"
rules for life insurance products. These laws follow the
Government's announcement last year, on which we have
previously reported, that it would seek to implement
recommendation 24 of the Financial System Inquiry.
New "benefit ratio" rules will be used to determine
whether a life risk product falls within the exemption to the ban
on conflicted remuneration in section 963B Corporations Act 2001
(Cth).1 These amendments are proposed in the Corporations Amendment (Life Insurance Remuneration
Arrangements) Bill 2016 and will commence on 1 July 2016
(or from the date of Royal Assent, whichever is the later).
The "benefit ratio":
is to be determined by ASIC;
is the ratio of the benefit received by the financial services
licensee (or their representative) and the "policy cost"
for the product; and
is to be calculated when the product is issued and in each year
the product is continued.
One of two benefit ratio requirements must apply to fall within
the proposed conflicted remuneration exemption:
that the benefit ratio is the same in the year in which the
product is issued as it is for each year in which the product is
that the benefit ratio is less than or equal to the amount
determined by ASIC as an acceptable benefit ratio for that year
and clawback arrangements are satisfied in
relation to the benefit.
In essence, the new clawback arrangements are an obligation to
repay "all or part" of a benefit received by a financial
services licensee (or its representative) if the product is
cancelled within the first 2 years after it is issued to a retail
client. ASIC will determine the minimum amount that must be repaid
by the financial services licensee (or representative) to satisfy
the clawback test.
Each of these tests seriously restrict the practice of paying
upfront commissions and are designed to limit an adviser's
incentive to churn clients into a new product to receive a new
A failure to meet these new rules will lead to the remuneration
being banned conflicted remuneration. Benefits received under an
arrangement entered into before commencement of the legislation and
where the life product is issued within three months after the
commencement day are unaffected by the reforms, with commissions
received from those products being grandfathered.
Although in theory level commissions are retained, maintaining a
constant benefit ratio year after year is difficult to achieve
given the definition of "policy cost" when calculating
the benefit ratio. Policy cost is the sum of:
premiums payable for the product for that year;
fees payable for that year to the issuer of the product;
additional fees payable because the premium is paid
periodically rather than in a lump sum; and
any additional amount prescribed by the regulations.
Accordingly, we expect many advisers will effectively be
required to implement clawback arrangements and abide by ASIC
determined benefit ratios as premiums and fees fluctuate over time,
unless regulations (or amendments to the Bill) are passed to
correct this potential issue.
explanatory memorandum for the Bill expresses Government's
intention that ASIC will gradually limit the permissible benefit
ratio year by year until 1 July 2018, there are no safeguards
in-built into the legislation to ensure such an approach as ASIC is
given an unfettered power to determine an "acceptable"
benefit ratio. It follows that perhaps only limited reliance should
be placed by industry on the Government's previous guidance
that benefit ratios would be capped as follows:
80 per cent from 1 July 2016;
70 per cent from 1 July 2017; and
60 per cent from 1 July 2018,
together with a maximum 20 per cent ongoing commission.
1 Group life products for members of a
superannuation entity or a life policy for a member of a default
superannuation fund will continue to be ineligible for the
exemption in section 963B despite the new rules.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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