Life insurance Advisers from around Australia are warning that proposed regulatory changes proposed by the Financial Services Council (FSC) aimed at reducing policy 'churning' in the industry.
(prHWY.com) September 4, 2012 - Palm Beach, Australia -- Queensland, Australia, 31st August 2012./ Financial Services Online.
"Life insurance Advisers from around Australia are warning that proposed regulatory changes proposed by the Financial Services Council (FSC) aimed at reducing policy 'churning' in the industry could leave consumers exposed."
"FSC chief executive John Brogden last month released details of a plan designed to reduce churning by penalising life insurance Advisers who encourage clients to change life insurance policies inside a 3 year time frame by forcing them to pay back commissions."
"However many life insurance Advisers see the proposal as potentially damaging for themselves and to clients because it goes too far."
"The term 'churning' refers to the practise of replacing one life insurance or income protection insurance policy with another policy in order to receive a new up-front sales commission without a net benefit to the life insurance customer. But many in the industry see the FSC proposal as throwing out the baby with the bath water."
"Whilst the industry agrees that churning is a problem, it is considered (even by the FSC) a small one and the proposed mechanism potentially compromises the client and, according to feedback reviewed by Financial Services Online, does not address the real issue."
Brokers argue that the move does nothing more than to protect the interests of financial institutions at the expense of the client.
"In a perfect world, a life insurance policy that is properly structured according to a client's needs shouldn't need replacing inside three years unless, of course, the client's needs change."
"Some Advisers argue that often their clients' needs may change, whether through employment changes, marriage, divorce etc, and a blanket regulatory approach that sees an Adviser required to rearrange and replace policies having to pay back commissions is not equitable, particularly in the case of a new client who has existing policies purchased elsewhere that may no longer be suitable to their needs."
"It is claimed that these changes often involve considerable work input from an Adviser who could be required to repay a commission that may have been received by another life insurance Adviser in the first instance."
"This could be a concern for example when a client encounters financial hardship and is forced to cancel their policies and the policies are not replaced because of the financial disincentive to the Adviser."
"Another problem arises in the common situation where a client changes to a new Adviser who, in turn, identifies inadequacies or changes in client needs that justify replacing existing policies - but cannot do so without penalty."
"There is also concern that the same disincentive will result in clients missing not by being offered the benefits of new or improved products coming onto the market."
"Broker feedback indicates that the proposed rules will not stop the unethical churning of life insurance policies because Advisers who perpetuate the practice will simply reduce the frequency of churning to 3 years."
"It seems that it might be more the case that the historic remuneration models that pay high up- front commissions to an Adviser that need to be reviewed because, without these, the incentives to churning are removed without penalising anyone. "
"Most companies offer level commissions and hybrid commission models that would have considerably less impact on brokers however the up front cost of providing initial advice and putting the necessary policies into effect are not always adequately served by these models."
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