In Australia the development of proposals under the "Future of Financial Advice" legislation is getting down to the practicalities of implementation. There are some very positive developments. But before we explore those, lets bring to mind the central issue for risk advice: commission payment.
Overwhelmingly this business is sold on a commission basis - even more so than investments. We have seen nothing like the consumer harm done in risk that we have seen in investments. While complaints exist, and so do conflicts of interest, there is a very great public good which is derived from having lots of people with adequate insurance. Billions of dollars in privately funded claims payments for the Christchurch earthquakes are a good case in point.
But in the debate about the more serious conflicts of interest issues that have occurred in investments there remains a risk that the whole distribution structure for risk would be swept away. If it didn't exist as a way to pay for the distribution of a typical life insurance package how would ordinary folk who can't afford to fork out $1,000 for a financial planning service pay for the advice they need?
It is therefore good to see the planned changed in the FoFA legislation in Australia. You can find out more over there, but here is a quick summary:
- Remember: individual risk business was never included
- Commissions will now be allowed again for life insurance sold as part of certain superannuation plans (individual choice plans)
- The government will introduce uniform clawback provisions on commission to reduce 'churning'
- There will be no ban on existing remuneration arrangements