Upfront commissions hit with reforms

Newly introduced changes elsewhere are hinting at just how deep any cut to upfront commissions will be for Canadian life advisors

Australia’s Minister for Financial Services recently released its insurance reform package that looks to clean up the industry there. Fortunately, for advisors, the changes will be phased in over three years giving them time to adapt.

“The final industry package includes this three year phased transition to ensure that advisers have time to adjust their business models to the reforms,” Assistant Treasurer Kelly O'Dwyer said in a statement earlier in November. “The Government has responded to industry concerns about ongoing business viability by moving from a three to a two year clawback period. However, through these reforms we are ensuring that there are strong incentives to prevent replacement of policies where there is no consumer benefit.”

As of July 1, 2016, upfront commissions will drop from a maximum of 120% today to 80%, 70% the year after and 60% after July 1, 2018. Previously, John Trowbridge, a former Australian Prudential Regulation Authority member had called for a $1,200 cap on commissions to reduce conflict of interest issues in the country. While this won’t be happening the new reform does include a 20% cap on ongoing commissions.

Here in Canada the three-person expert advisory panel charged by Ontario’s Minister of Finance with reviewing FSCO and DICIO delivered 37 recommendation. Chief among them is the suggestion the two regulators be merged into one group named the Financial Services Regulatory Authority.

What next happens in Ontario is anybody’s guess, but it very well could include the same type of changes now underway in Australia. The relatively good news coming out of regulatory reform Down Under may bode well here.

The best news for Australian insurance advisors is that the proposed three-year clawback on commissions will in fact be two years, a major bone of contention for The Association of Financial Advisers.

"Members indicated almost unanimously that three-year clawback was the greatest issue," Association of Financial Advisers national president Deborah Kent said. "To succeed in having this reduced to two years is a great relief for our members, particularly those that own and operate small businesses."

Under the two-year clawback up to 100 per cent of the commission on the first year's premium will be retained when the policy lapses within the first year and up to 60% in the second year of the policy.

Insurance advisors in Australia aren’t out of the woods just yet. That’s because the 2018 review by ASIC could still lead to level commissions while eliminating upfront commissions.

"The government previously announced that the Australia Securities and Investments Commission (ASIC) will undertake a review of the reforms in 2018,” said O’Dwyer. “If the 2018 review does not identify significant improvement, the government will move to mandate level commissions, as was recommended by the Murray inquiry.”