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Regulatory Roulette Can insurance intermediaries keep dodging the bullets of reinvigorated regulators? By Jeff Morse
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its members to move to a fee-based system by 2012 to dispel accusations of conflict of interest, while the rival Association of Financial Advisers argues that banning commissions takes away a consumer’s right to choose. ASIC has told the parliamentary inquiry it plans to identify the impacts of remuneration structures on conflicts of interest and on the quality of advice. Insurance brokers well remember when their commissions last went under the regulatory magnifying glass five years ago. That followed a huge public outcry in the United States involving mega-broker Marsh. Crusading New York Attorney-General Eliot Spitzer accused some brokers of steering business toward preferred insurers that paid them higher commissions. They also solicited phoney quotes to make a preferred insurer’s bid looked more competitive. The Australian Prudential Regulation Authority promised to keep watching developments in the US as many states banned so-called contingent commissions and broking companies abandoned them. insuranceNEWS
October/November 2009
Some global broking leaders, like Willis Group Chairman and Chief Executive Joe Plumeri, says brokers can’t be true professionals until they drop commissions and move to a “fee for service” basis. NIBA’s response to the commission versus fees issue was comprehensive: its Insurance Brokers Code of Practice outlines obligations members must follow to avoid conflicts of interest. But whatever course the various intermediary groups take, regulators are exposed to the views of lobby groups that are, for the most part, unequivocal: commissions must go. At high-profile consumer group Choice, Senior Policy Officer Elissa Freeman says if people are getting advice about insurance as part of a holistic approach to financial planning, they should pay for it in a way that can’t corrupt or bias the advice in any way. “That is, in our view, remunerating the adviser through a fixed dollar fee for fixed service,” Ms Freeman told Insurance News. However, the regulators have a plethora of issues to deal with. Notable in the field are new requirements for reporting all contracts with insurers (APRA-authorised and otherwise) and increased dispute compensation caps. Particularly sobering for the insurance industry this year are recommendations from the Senate Economics Committee inquiry into the Trade Practices Amendment (Australian Consumer Law) Bill that highlight the fact that risk insurance isn’t seen as exceptional when it comes to consumer protection. Despite the proposed insurance exemption in the Bill, the committee says it is not convinced insurance contracts are beyond the scope of both industry-specific legislation and general consumer protection laws. A revision of the Insurance Contracts Act 1984 is expected as a result. Mr Vrisakis says this is posing some real challenges for everyone in insurance “in terms of when it might be implemented and the potential compliance costs”. The balance between consumer protection and commercial viability will, no doubt, keep the insurance industry on its toes for years to come. SUMMIT2072
f you’re wondering about the next set of regulatory challenges the Federal Government might be planning for the risk insurance industry and its clients, you’re not alone. Freehills Sydney partner Michael Vrisakis says everyone involved is “a little bit perplexed”. No wonder. Creeping regulatory reform – and the costly red tape that embodies it – was on the upswing even before the global financial crisis landed last year and gave regulators a whole new impetus. The crisis has served to increase scrutiny on financial services and underline the fact that Australian general insurance, in particular, is interconnected with other sectors and other countries. Mr Vrisakis keeps a weather eye out for looming red tape, and he sees some on the horizon. Commissions, for example. He says it “wouldn’t be a quantum leap” if the Australian Securities and Investments Commission’s (ASIC) current examination of commissions in the managed investment industry spilled over into insurance broking. While no such moves in the direction of general insurance intermediaries have been made to this point, it’s still early days. The joint parliamentary inquiry into financial services and products ostensibly has everything to do with adviser licensing and conflicts of interest surrounding investments in the wake of the spectacular Storm Financial and Opes Prime corporate collapses. Could insurance brokers find themselves caught up in any recommended clampdown on financial advisers’ commissions? The National Insurance Brokers Association (NIBA) is making sure its members are kept out of the line of fire. In a submission to the inquiry, it has argued that any flow-on change in licensing requirements for brokers wouldn’t be warranted. The brokers say they’re doing the right thing in terms of handling potential conflicts of interest arising from the commissions that form the bulk of their income. Remuneration has been a hot topic in other submissions and the ensuing public debate. And it has led to some bitter splits in the financial advice industry. The Financial Planning Association wants