Last week, we discussed the Government’s “buried” release of its draft legislation outlining plans to establish the Compensation Scheme of Last Resort (CSLR).
Accompanying that release was a report from ASIC on its research into how the industry has transitioned away from grandfathered commission arrangements. You can read the full report here if you haven’t already, but the main takeaways are that over ASIC’s review period (the 2018-19 financial year) product issuers terminated 96% of so-called “grandfathered conflicted remuneration” (GCR) arrangements and rebated $266.7 million to product/policyholders, which more or less cleared the deck for the ban on GCR from January 1st.
Describing these results as “very pleasing,” ASIC also noted that the industry’s preparations ahead of the GCR ban included changes in how advisers charged their clients. Based on member surveys from the AFA and FPA, advisers moved many clients into alternate fee structures, such as hourly rates, fixed price agreements and asset-based fees.
However, the AFA’s survey revealed that an average of just 25% of clients were transitioned into ongoing fee arrangements. For the remainder, advisers moved clients into a transactional advice fee model, provided pro-bono advice or ceased providing services entirely.
It won’t surprise many reading this that the survey respondents prioritised high-value clients when moving to ongoing fee arrangements; ASIC suggested a common refrain was that “the economics of continuing to provide services to lower-value clients has become challenging.” In fact, some participants in both the AFA and FPA surveys said the ban on GCR has led them towards exiting arrangements with lower-value clients.
While the ban on GCR kicked in this year, the advice industry has been under increasing pressure to overhaul its fee structures for quite some time. Since the Life Insurance Framework removed the insurance exemption on the conflicted remuneration ban and gave ASIC the power to set commissions caps, advisers have been gradually winding down their exposure to this kind of remuneration – to nearly zero, as ASIC’s report demonstrates.
And at this point, especially since Treasury will be reviewing the LIF and other matters in 2022, it’s worth asking: was it all worth it?
Based on preliminary results from the survey we sent out last week, perhaps not. While the stated goal of these reforms was to better align the commercial model of financial advice with clients’ best interests, the majority (85%) of our community said the LIF has resulted in a reduction in their client bases. This tracks with some of the findings in ASIC’s report; in there, ASIC said FPA and AFA members reported a material reduction in income (in the range of 15-20%) as a result of the GCR ban.
One of our survey respondents, who has spent 43 years in the industry, said the LIF has had a “huge negative impact on our industry and my practice.”
The commenter continued: “Many of the older and smaller clients cannot afford to pay fees to us. The commission way of remuneration was and is the best way of serving the clients best interests and assisting advisers get remunerated fairly.”
They added that advisers will now prioritise “high-end clients” while lower-value clients – “who need insurance cover the most” – won’t be able to access affordable advice.
Another respondent said the LIF has caused “huge problems for our industry,” adding that it (along with FASEA requirements and the Code of Ethics) will result in “more advisers [leaving] as of 31 December 2021.”
Not long ago, we discussed a ClearView report which identified the LIF (and its ongoing effects) as a “major concern” for the advice industry. ClearView general manager, life insurance Gerard Kerr said that while life insurance advice and claims management remain “a key part of the advice proposition,” a shrinking cohort (63%) of advisers see risk advice as being a core part of their offering in the future. This is despite over 75% of advisers surveyed in 2020 seeing risk advice as a core part of their job and nearly all (93%) saying claims management as an “important value-add for clients”.
“The falling number of those advising on life insurance is a major concern,” Kerr said, because “fewer advisers means fewer people receiving professional advice.”
While advisers have very clearly demonstrated their ability to reorganise their businesses ahead of the GCR ban, nothing in ASIC’s report contradicts Kerr’s observation. If Treasury’s upcoming review is aimed at increasing the availability and affordability of advice, this might be something to consider.
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