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ASIC sets commission caps and clawback amounts for life insurance

Ann-Marie_ColemanIn February this year the Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017 (the Act) was passed by Parliament, followed by the associated regulations. Our updates on these can be found here and here. The Act removed the exemption from the ban on conflicted remuneration for commissions paid in relation to certain life insurance products. The Act also enabled the Australian Securities and Investments Commission (ASIC) to allow commissions to be paid if requirements around commission caps (benefit ratio requirements) and clawbacks are met.

ASIC has now made ASIC Corporations (Life Insurance Commissions) Instrument 2017/510 (ASIC Instrument) which allows commissions to be paid for the sale of life insurance, but sets limits on the commissions and contains clawback requirements if the policy is cancelled within its first two years. The ASIC Instrument will commence on 1 January 2018.

Commission caps

The ASIC Instrument provides for a transition period in respect to the limits on commission, so that commission is capped at:

  • 80% of the premium for the first year of the policy, from 1 January 2018
  • 70% of the premium for the first year of the policy, from 1 January 2019
  • 60% of the premium for the first year of the policy, from 1 January 2020.

The ASIC Instrument also caps commission for subsequent years following the first year of the policy at 20% (there is no transition period in respect to this cap). Further, if the benefit is given because of a client initiated increase then specific formulae apply.

Clawback amounts

The ASIC Instrument sets out acceptable repayment amounts if the policy is cancelled in its first two years.

If the policy lapses in the first year (i.e. it is cancelled, not continued or the policy cost for the product for the first year is reduced), then the licensee must repay 100% of the commission (or the percentage of the commission that is equal to the percentage by which the policy cost has been reduced). If the policy lapses in the second year, the licensee must repay 60% of the commission (or 60% of the percentage of the commission that is equal to the percentage by which the policy cost has been reduced).

There are specific formulae for working out the clawback amounts depending on when the lapse occurs.

Take-aways

These are significant changes for licensees operating in the life insurance industry. Licensees should familiarise themselves with the commission caps and clawback amounts so that they can comply with these requirements from 1 January 2018.

ASIC has indicated that the introduction of commission caps and clawback amounts is intended to reduce the incentives for advisers to provide inappropriate advice to clients. ASIC has also warned advisers against inappropriately switching clients to new policies prior to the 1 January 2018 where this is not in the client’s best interests and noted that they are using data from insurers to undertake targeted surveillances to seek out any advisers engaging in this misconduct.

Further information can be found here.