Insurance industry told to allay consumer fears or face more regulation

"I am saying to the industry now, you get on with the job as a matter of urgency," said Assistant Treasurer Josh Frydenberg. Photo: Andrew Meares

Australia's troubled life insurance sector needs to come up with solutions to mend consumers' distrust in the industry  during the next few weeks, or be prepared to face increased government intervention, warned Assistant Treasurer Josh Frydenberg.   

Speaking at a Financial Services Council breakfast in Sydney on Tuesday, Mr Frydenberg said the industry had a matter of weeks and not months to tackle conflicted payments such as hefty up-front commissions. 

If the industry failed to act sooner, Mr Frydenberg warned that: "We will have to agree on a course of action which may involve further government regulation, but we would prefer not to do that."

"We would prefer a co-regulatory model, where the industry has a big say on the outcome ... I am saying to the industry now, you get on with the job as a matter of urgency."

Mr Frydenberg fired the warning shots after the Australian Securities and Investments Commission found almost one out of two pieces of advice given by planners who sell life insurance had failed to comply with the law. Former Australian Prudential Regulation Authority member John Trowbridge issued a report in response to the regulator's findings, and proposed a $1200 cap on up-front payments for advisers. 

Mr Trowbridge also suggested broadening advisers' approved products lists, and that financial planners should not pocket more than 60 per cent of the first year's premiums if a policy costs less than $2000.

His suggestions have drawn backlashes from advisers who argue it would simply not be profitable to write life risk business because they would earn less than the cost of setting up policies. The Association of Financial Advisers of Australia, which commissioned the report with the FSC, urged caution before adopting any of Trowbridge's recommendations.

But Mr Frydenberg said public confidence in the financial advice sector had been "shaken – and understandably so" after the number of high-profile product and advice failures in recent years. Financial planners from Commonwealth Bank, Macquarie Private Wealth and National Australia Bank have been caught up in cases of dodgy advice that cost clients their retirement savings. 

Trowbridge's recommendations around commission structures, ensuring approved product lists cover at least half of all providers and a re-examination of the culture of advisers, among others, were are all deserving of consideration, he said. 

"You come to government with your proposed changes, and we will weight that up against what ASIC and Trowbridge and the FSI has recommended, and we will make a decision," Mr Frydenberg said. 

"But give us something to work with by you taking the lead."