These new rules have grandfathering provisions, meaning policies sold before 2018 will have more lucrative trail commissions for advisers â€“ an incentive for the adviser to keep their client in the product.
“I think when the grandfathering provisions were put in place, what wasn’t put in place was any kind of end date or sunset clause around that. So that’s now really come into question. And I think there is some chance that the grandfathered commissions under FoFA will be addressed in some way,” Mr Hackett said.
Under the new rules, life insurers are permitted to pay upfront commissions of no more than 80 per cent of the value of the premium, and 20 per cent of the premium in ongoing or “trail” commissions. The upfront limit will be reduced to 60 per cent on January 1, 2020.
Prior to the LIF, life insurers were paying as much as 120 per cent of premiums in upfront commissions, which encouraged advisers to regularly switch their customers into new life policies â€“ a practice known as “churning”.
Commissioner Hayne delivered his final report to the Governor-General on Friday. It will be made public on Monday afternoon.Â OOSGG
The LIF aims to stamp out churning with “clawback” rules that require advisers to return all or part of the upfront commissions if they move the customer into a new product during the first two years.
While Mr Hackett said the royal commission might target grandfathering provisions, he did not predict commissions on life insurance products would be banned outright, saying the LIF was already in place and should be allowed to run its course until the scheduled review in 2021.
“I’m all for a healthy system that gets good solutions into customers’ hands, and allows advisers and manufacturers of product to make a reasonable and sustainable return. At the moment commissions play a role in that. If you’re going to move away from them, the you need to be very clear about how the new system is going to work,” he said.
In its submission to the royal commission the Australian Securities and Investments Commission recommended leaving the current regime untouched until the LIF review in 2021.
While this will be welcomed by the financial advice and life insurance industries, ASIC said that so far it had observed poor advice had continued, and that if there is no improvement by 2021, “there would be a compelling case to remove the exemption from the ban on conflicted remuneration currently afforded to the sale of life insurance products altogether”.