Life Insurance Made Safer By New Reforms

After years of debate and scandal concerning the life insurance sector, the Turnbull government has passed legislation designed to enhance consumer outcomes.

The Minister for Revenue and Financial Services Kelly O’Dwyer stated that the reforms “demonstrate the Government’s commitment to building trust and confidence in the financial advice industry”.

“The Government is delivering on its ambitious financial sector reform agenda to improve consumer outcomes in the financial services industry,” O’Dwyer said.


The aim of these reforms is to “reduce the financial incentive for financial advisers to churn consumers into new life insurance policies where there is no consumer benefit”.

The reforms have come to fruition as a result of the findings of several reviews including the government-commissioned Financial System Inquiry and the 2014 ASIC Review. These two reviews found a strong connection between high upfront commissions and poor consumer outcomes, along with “unacceptably high instances of poor quality life insurance advice being provided to consumers”.

What will the reforms entail?

The reforms are set to commence on 1 January 2018, and include:

  • A reduction in the upfront commissions paid to advisers to a maximum of 60% from 1 January 2020, and the introduction of a maximum rate of 20% for ongoing commissions.
  • The introduction of a 2-year commission (claw-back) period, which will allow the retrieval of 100% of an upfront commission in the first year and 60% of an upfront commission in the second year in instances of a policy lapse.

The reforms will also introduce new requirements for financial advisers, including:

  • Compulsory education requirements for both new and existing financial advisers
  • Supervision requirements for new advisers
  • A code of ethics for the financial advice industry
  • An exam that will represent a common benchmark across the industry
  • An ongoing professional development component

The requirements for qualification outlined above will come into effect on 1 January 2019, giving existing advisers a year after the reforms are first implemented to make sure they meet the new requirements.

What has the response been like?

The immediate response to the reforms has been largely positive so far, with the Labor Party, the Financial Services Council (FSC), the Australian Bankers Association (ABA), and the Association of Financial advisers (AFA) all welcoming the reforms in some shape or form.

Labor’s response

The Shadow Minister for Small Business and Financial Services Katy Gallagher released a statement saying that Labor welcomes the new reforms, but also emphasising that the Turnbull Government was now responsible for making sure said reforms are implemented in a timely matter.

“With these laws now in place, the onus is on the Turnbull Government to ensure the smooth implementation of the reforms,” Senator Gallagher said.

“With a reasonable transition timeframe in place, there is simply no excuse for any delays or failures by this Government.

“The success or otherwise of these new laws rests entirely with the Government, and Labor will be monitoring this closely.”

Senator Gallagher also said, “Labor has supported these laws but we know that more needs to be done to protect consumers from the rip-offs and scandals that the financial services industry has become known for in recent years.”

The FSC’s response

The FSC’s media release concerning the laws described the reforms as “important amendments”, saying that they “enhance consumer outcomes and strengthen the advice and life insurance sectors”.

“This is a significant piece of reform which will strengthen financial advice and community trust in the industry,” the FSC said.

“Consumers will have confidence that those they entrust to provide them with advice meet high standards of initial and ongoing education and professional standards.”

FSC CEO Sally Loane said that “these two landmark pieces of reform passed today will strengthen consumer outcomes and benefit both financial advice and life insurance”.

“The Government has delivered on its commitment to strengthen consumer outcomes in financial advice and life insurance and we are pleased to see these key pieces of reform pass Parliament today,” said Loane.

The ABA’s response

The ABA also welcomed the new legislation, with ABA Chief Executive Steven Münchenberg saying, “The banking industry supports the Federal Government’s commitment to improve the quality of financial advice offered to Australians.”


“Introducing higher education requirements for financial advisers and a new code of ethics will be important to raise the professionalism of financial advice,” Münchenberg said.

However, Mr Münchenberg also emphasised that “banks had already taken steps to ensure their financial advisers adhere to high professional standards”.

The AFA’s response

The AFA’s response to the passing of the reforms was not as positive as others; however, they did describe the new laws as “improvements” and say that they allow for “greater fairness”.

The organisation emphasised that they still believe financial advisers to be “the best consumer option by a mile”, with AFA CEO Brad Fox saying that advised life insurance policies were superior to group life insurance and direct life insurance.

“The changes brought by this Bill are designed to encourage the public to have more trust in using a financial adviser, rather than taking the risk of arranging their own life insurance and getting a weak policy, or the wrong amount or type of insurance for their personal situation,” Mr Fox said.


Mr Fox stated, however, that the passing of the Bill did not signal the end of life insurance reform. He agreed progress had been made but that “more work is required from the insurers, superannuation trustees, ASIC, and some licensees to carry their share of life insurance reform”.

“We will be working to focus attention on completion of the remaining reforms by other players, while supporting our members as they prepare for the start date of 1 January 2018,” Fox said.

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