On January 1st 2020 there were 2 major changes to Financial Planning (broking) and Personal Insurance in Australia. The first was the introduction of the FASEA Code of Ethics and the second was implementing the final stage of the Life Insurance Framework (regarding commissions). In a ‘post Royal Commission world’ this means that the old way of doing business is, quite frankly, unsustainable and clients and advisers alike are tumbling down the rabbit hole of trying to understand what has changed and what this means for them. Coupled with changes to insurance products coming up on March 31st I have been getting a lot of questions. So in usual style, Friday afternoon Blog!

If you feel like your head is spinning, you are not alone.

The Cost

Providing advice and running an advice practice is far more expensive than it used to be. Almost 10 fold over 4 years by some accounts. All advice must be in written form and updated each review meeting, even if no change is required, and sufficient research must be undertaken to show the adviser has investigated all relevant options. We are no longer allowed to work on “client instruction” only. Compliance and administration, for ever-deepening product pools, require more research and a greater skill sets than ever before. Coupled with ever changing legislation, this means an adviser working alone as a sole trader is a dying breed. Plus sole advisers are facing challenges in insuring themselves for Professional Indemnity as required by law.

Advisers who may have been practising for 30+ years as a CFP have been told they need to sit an ethics exam by year end and get an approved university degree by 2024. The cost to study and the time out of their business to do so, is and will be significant. So significant that in the first half of 2019, 16 advisers took their own lives and 1,750 left the industry in the June quarter alone. Considered Total adviser numbers were around 25,000 in 2017 this is not a insignificant change and some estimates say the total number of advisers is set to nearly half in the next few years.

Edit: As of January 2023 there were 15,833 advisers remaining. Not quite as harsh as some estimates, but not far off.

The Commissions

Commissions on investments including superannuation and managed investments have been banned since 2012. There are a handful of “Grandfathered” commissions on older products and these are being phased out by the end of this year if not already. Commissions on life insurance which include TPD and Income Protection etc have reached the final stage of reforms and advisers can now choose only 2 remuneration options across all insurers:

• An upfront remuneration which is 60% of the insurance premium in year 1 and 20% ongoing

• A level remuneration which is 30% of premium per year from year 1 onward.

No exceptions. All insurers are the same. If a policy is cancelled or amended within the first 2 years the adviser must return these funds to the insurer. This is a far cry from the heady days where commissions in year 1 might be 120% up front and this could be cancelled and replaced every 13 months allowing clients to shop around or advisers to “churn”. Advisers can choose to rebate commissions or “dial down” so they receive nothing and charge a fee for the work they do instead.

The Code

The Code of Ethics is a subtle beast indeed

The Financial Adviser Standard and Ethics Authority (FASEA) is a newly created body that was created to lift the standard of financial advice and ultimately ensure that consumers are better looked after. Since their inception in 2017 they have set standards for education pathways and created a code that went into force this month. This process has not exactly been smooth and they certainly have their work cut out for them but most advisers agree that change is needed if financial advice is ever to become a trusted profession.

Please click here for more info but essentially The Code is an expansion of the Best Interest Duty which has been around since 2013. Advisers must now:

• Identify any conflicts of interest and, if this can not be removed, not provide advice or service.

• Establish if the client understands the advice given and prove this is the case

• Ask themselves if the advice that they have given represents good value to the client, regardless of if they understand and agree to advice and subsequent fee

• Consider and identify any broad reaching implications of their advice and the effect of this and provide evidence that sufficient investigation was undertaken to identify this.

This may sound all well and good these are creating significant “what ifs” as advisers wade though these rules and what they actually mean. Amendments and clarifications are sure to follow.

In the past insurance advice was purely commission only and advisers or brokers (both have the same license and rules) could even provide “no advice” which allowed clients to provide an amount they want to be insured for and they would simply give a few options and say “pick one”. Now extensive background work must be done to justify insured amounts. This means that in a lot of cases a client who wants perceived ”simple“ cover requires the same amount of ”work” as more complex cases and the adviser must ensure they investigate everything regardless of if the client has requested this or not.

Commission based payments meant that a “deferred remuneration” system was widely accepted, where the larger commissions paid by policies with greater premiums subsidised the smaller cases or the cases where insurance might be declined due to ill health etc. This is how insurance works at its very core, the sick people get paid for by the healthy. With relatively low operating costs, running an insurance broking service was simple and profitable and no upfront cost was the norm. Ongoing commissions are attached to policies and have little or no work required so the adviser might not have covered costs of work undertaken in year 1 but would in time. With rising costs and lower commissions payable this model is becoming unsustainable which is why a fee for service is increasingly common.

So what does it all mean?

All of these changes are meaning that advice models are changing very rapidly and both advisers and clients alike are unable to rely upon the usual way of doing business. Personally, I am optimistic that after a few years we will have a profession that is recognised as trustworthy, fair and competent and the Code of Ethics is a big part of that process. Unfortunately, in the short term this means greater cost to everyone in both providing and seeking financial advice.

As always this does not constitute personalised advice and is simply my thoughts and interpretation to help clients understand their options. Advisers, planners and “brokers” have different business models and make different offerings to their clients but if they are licensed to provide financial advice (AFSL holder) they must all follow the code and work in an ethical manner that benefits their client.

If you have read a few of my blogs you may recall me mentioning the strife going on behind the scenes with insurance. Disability Income Insurance (commonly called Income Protection) in Australia recorded a 1 Billion dollar loss in the first 9 months of 2019 which pushes total losses over the last 5 years to 3.4 Billion.

APRA stepping in to limit losses and provide sustainability.

On Monday the Australian Prudential Regulation Authority (APRA) stepped up and have proposed the following changes:

• ensuring DII benefits do not exceed the policyholder’s income at the time of claim, and ceasing the sale of Agreed Value policies;

• avoiding offering DII policies with fixed terms and conditions of more than five years; and

• ensuring effective controls are in place to manage the risks associated with longer benefit periods.

So what does this all mean?

Regulators, insurers and of course advisers are still wading through the details as this is still just a proposal with a consultation process. Early expectations are that this simply had to happen.

Agreed Value Income Protection

If you have a good quality income protection policy in place you likely provided financial information at time of application. The insurer would then “endorse” your insured value so when or if you make a claim there is no financial information required, just a medical professional signing off that you can not work and the claim is made.
If you have an “indemnity” contract a claim would be limited to 75% of your income in a 12 month period, or your insured value, whichever is higher. Sounds simple but if you are newly self employed, say you opened your own practice and are still building patient numbers, or if you have been on maternity or unpaid leave this could be 75% of far less than you should actually be earning or what you are really “worth”. This is especially prevalent in the case of small business where books seem to fall on the wayside and tax returns and financial can be 2-3 years behind. Laying in a hospital bed trying to arrange your last 2 years tax returns to be completed is not an ideal scenario.

Guaranteed Renewable contracts

Any good insurance policy will offer a guaranteed renewable contract. This means that the insurer may not change the contract to your detriment as long as you continue paying the premium. Some even offer “auto upgrades” to new definitions etc. So how does this work? Well if you were a hospital based administrator (low risk rating) when you applied for your policy and then a few years later decide to go join Médecins Sans Frontières and work on a vessel off the coast of West Africa you would still be covered. Under the new rules you would need to alter or renegotiate your contract at least every 5 years and subsequently change your “rating” accordingly and, in this example, likely would not be insurable at all.

“Age 65” benefit periods?

This is a little vague at this point but while it looks like age 65 or 70 benefits may still be offered there now needs to be “effective control” to manage the risk involved with what could be an insurer bound to paying a monthly benefit for over 30 years. A likely outcome is that “own occupation” IP may only be offered for a short term such as 5 years with this reverting to more general definitions over the longer term. Effectively this means that if you were on long term claim you would need to be unable to engage in paid employment of any sort to continue claim. TPD cover will likely still be on offer under own occupation so this is a natural pairing to help cover this uncertainty.

What can you do?

While this is still early days if these changes do happen it is very likely that any contract “in force” before March 31st will stand. If you have been considering maybe reviewing or establishing good cover, do it now not later as this does take time to apply for and establish.

If you were unaware, we service insurance clients across Australia virtually and have access to a network of other professionals like us across Australia if you want a face to face meeting. We don’t like to be blunt but this is quite simply the biggest change to Income Protection or Insurance as a whole in Australia in living memory and is not to be taken lightly.

As always this is not to be considered personal advice and this information is general in nature only.

There’s a common perception that life insurance companies will do everything they can to avoid paying claims.

In fact, 92% of all life insurance claims are paid in the first instance¹.

As long as you fulfil your duty of disclosure when you apply for cover, and you’re covered for the medical condition you’re claiming for, you should be confident your claim will be paid.

Will I still be covered if my health changes?

Once you start your cover, what you are covered under your life insurance for won’t change – even if your health deteriorates.

In fact, you don’t even need to tell your insurer about a change in your health unless you intend to make a claim.

Why are some claims declined?

The main reasons life insurers decline a small percentage of claims are:

• claims outside the policy definitions

• claims are specifically excluded from the customer’s policy (e.g. due to pre-existing medical conditions)

• non-disclosure of a pre-existing medical condition. In this case, the insurer will generally take into account what that condition was, what cover they would’ve offered if they knew about that condition, and whether that condition is related to the claim.

• fraudulent claims. 

1. https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-070mr-apra-and-asic-publish-world-leading-life-insurance-data