Life insurance industry failing to heal itself

Submissions were secret and some were so confidential they were only allowed to be read by the independent chairman John Trowbridge. Photo: Dominic Lorrimer

A controversial report into the $40 billion life insurance industry was stillborn the week before its release.

An email sent by one of the members of the Life Insurance and Advice Working Group (LIAWG) to hundreds of financial planners claims that just before the report was released, the mandate changed. The email raises serious questions about the integrity of the report and the ability of the industry to reform itself.

It means the financial system inquiry, which is currently receiving public submissions, and the Abbott government will need to shoulder responsibility for some long overdue reform.

Illustration: Kerrie Leishman.

It is worth remembering the working group was set up by the Association of Financial Planners (AFA) and the Financial Services Committee (FSC) as an industry response to an explosive report into the life insurance industry by ASIC.

The ASIC report found widespread systemic problems. It found that 37 per cent of advice was in breach of the law and 45 per cent failed when high upfront commissions where taken.

Given 82 per cent of the industry uses upfront commission, the findings should have been a call to arms to the regulator - and government - to step in to an industry dogged by financial planning scandals at CBA, Macquarie and NAB.

Six months on, the industry response is unravelling. It is little surprise given the working group was flawed from the beginning. It lacked transparency and it didn't include any consumer representatives, regulators or other financial planner member groups including the FPA, which has thousands of members. Submissions were secret and some were so confidential they were only allowed to be read by the independent chairman John Trowbridge.

That decision to cloak the submissions in secrecy has come back to bite the process and ultimately the integrity of the report.

The email, obtained by Fairfax Media, claims the original mandate was changed a week before the report came out.

"The original mandate was to develop an industry-wide response to ASIC's Life Insurance report issued in October 2014, which identified high levels of poor advice," said the email written by John de Zwart, managing director of ASX listed Centrepoint Alliance.

Centrepoint owns Professional Investment Services, a network of financial planners.

"The working group's mandate changed in the week prior to the final report's release and became the report of the chair [John Trowbridge], representing his views and not a consensus view. Whilst the AFA representatives objected to this change in mandate, the FSC supported the change," he said.

On the working group, de Zwart represented the AFA. He is also a member of the FSC's advice committee board, which makes his attack all the more fascinating. He says the report now reflects the views of John Trowbridge and "has many similarities in regards to adviser remuneration with the FSC's Life Insurance Sub Committee recommendations".

Trowbridge recommends a $1200 cap on initial upfront advice commissions on a per client basis, a maximum 20 per cent a year trailing commission and a three-year transition period for reforms. It also recommends upfront fees can only be claimed every five years per customer to reduce churn.

The problem seen by many planners is it costs a lot more – double or triple - the $1200 cap to set up a life insurance policy, so who will be the winner from the reduced upfront commission, the consumers or the product manufacturers? Most believe it will be the product manufacturers, many of which are represented by the FSC.

The FSC's submission was not made public and Trowbridge refuses to divulge its contents. However, Trowbridge denies the mandate was changed before the report was released. He refers to the foreword in the interim and final reports, which makes it clear the report would be his, not the working group's. "Any opinions and views expressed that are not otherwise qualified are those of the chairman and do not necessarily have the support of the AFA or the FSC or of any particular segment of the life insurance industry, AFS licensees or the advice industry," he quotes from the draft report. The final report says "recommendations in this report are mine and mine alone".

That might be so, but it is confusing given the terms of reference states the LIAWG will "provide a unified response to the identified issues and address the three key issues arising from the report: remuneration structures; product design issues; and quality of advice".

The working group's decision to keep submissions confidential has blown up in its face. Indeed, de Zwart calls on financial planners to "ask to see your insurer's submission as many were private to John Trowbridge and the FSC secretariat. If they decline, you should question whether they support independent advisers."

He says "please do not vent frustrations at regulators or politicians publicly. This entrenches views of self-interest amongst the community."

CBA whistleblower Jeff Morris has seen far too much self interest. He sees insurance as too important an issue to be left to an "indolent regulator" and the "self interested" big players to resolve. "As with other recent failures in this industry, a parliamentary inquiry would seem to be the best means of getting to the nub of the problem and finding a real solution." Indeed.