The long-awaited Life Insurance Framework (LIF) regulations have been released in draft form and are a mixed bag of: unsurprising provisions that meet expectations, a surprise concession, a potential loophole, and some vital omissions.
The draft regulations are open for comment until Thursday 28 April 2016. The regulations will start on the same date as the relevant new LIF Act, currently expected to be 1 July 2016. For an explanation of the LIF changes proposed by the Bill, see our previous article here. imac legal & compliance’s summary and insights follow.
What are the LIF changes and what do they mean?
Life insurance benefits to be conflicted remuneration
First, as a matter of formality, the draft regulations repeal the current regulation (7.7A.12A) that exempts life insurance monetary benefits from being conflicted remuneration. The effect is that monetary benefits relating to life insurance will now be conflicted remuneration and the LIF rules will apply (unless exempted under other provisions).
Stamp duty included in ‘policy cost’
In determining the ‘policy cost’ (which is the vital common denominator for determining commission caps) the regulations include a surprise concession. That is, to enable insurers’ systems to be updated, stamp duty will be included in the policy cost calculations for the first 12 months of operation of the new regulations. This means that commissions will be higher for any new policies during the first 12 months of the regulations than they will be for policies that start after the initial 12 month period of the regulations as stamp duty will be included in the calculation of the policy cost in the first 12 months of the regulations only.
Clawback exemptions detailed
Four circumstances are given where commissions will not be able to be clawed back even though a policy is cancelled during the clawback period. The circumstances are:
- the insured commits suicide;
- the insured commits an act of self-harm (Note: the may prove problematic as insurers may have different definitions of self-harm);
- the insured reaches the relevant age under the policy that results in the policy cancelling or not continuing;
- the person to whom, or in relation to whom, the life insurance product is issued is not correctly described due to an administrative error [and therefore resulting in a cancelled policy].
Also, 2 circumstances are given where commissions will not be able to be clawed back during the clawback period even though the policy cost is reduced. The circumstances are:
- where the policy cost is reduced because of a reduced risk to the health of the insured (e.g. the insured gives up smoking, resulting in a reduced premium);
- the policy cost is reduced because a rebate is paid or a discount applied and it is reasonable in all the circumstances to conclude that such rebate or discount was applied to induce the person to whom the product was issued to acquire, or continue to hold, the product.
* imac insights: Note that the way the regulations are currently drafted it is possible that adviser-initiated rebates to clients, no matter how minimal, could result in clawbacks not being able to be enforced. It is not clear if this was intended or not, but in our view it would potentially be acceptable, for example, for an adviser to embark on a systematic program of minimal client rebates and therefore never face the prospect of clawbacks. The regulations do not currently require that the rebate or discount is applied only by the insurer and it is arguable that providing an adviser-initiated (or licensee-initiated) rebate to the client has the effect of reducing the ‘policy cost’ as well as an intent to induce the client to continue to hold the product, thereby meeting the relevant criteria to be exempt from clawback. Likewise, it will be possible for insurers to initiate ongoing client rebate or discount programs, thereby effectively doing away with clawbacks. It will be a matter of watch and see if there are further changes or clarifications to these provisions. In any case, we recommend you seek legal advice to ensure that you are covered in case you wish to act on this potential loophole. Like many other LIF provisions, we think there will be a practical focus on evidence at the industry level to prove that certain conditions are met. E.g. even if you can legitimately rebate clients and avoid the clawback provisions, there are no guarantees that insurers would accept such evidence and therefore not clawback the commission.
Some employee arrangements exempt
If a benefit is paid to an employee under an enterprise agreement or collective agreement that was entered into before the regulations start, it will be possible to grandfather such benefits. If the agreement was not expired before the regulations start, such benefits will be able to continue to be paid up until six months after the nominal expiry date of the agreement. Or, if the nominal expiry date of the agreement passes before the start of the regulations, the benefits will be able to be paid for 12 months after the regulations start.
If another type of arrangement (i.e. it isn’t either an enterprise or collective agreement) between an employer and employee is in force before the start of the regulations, benefits that would otherwise be banned can continue to be paid up to 12 months after the start of the regulations.
Pre-existing clients exempt
If a client held a life risk product immediately before the regulations start and the client then acquires a post-commencement product by exercising an option given to the person under the pre-commencement product, the LIF provisions (i.e. commission caps and clawbacks) do not apply to the new product.
* imac insights: the way the regulations are drafted it is not necessary for the option in the pre-commencement policy to be in existence before the regulations start, merely before the policy lapses. Also, it is possible in our view that a pre-existing product could contain more than one option.
Disappointingly, the regulations do not address some shortcomings we initially identified in our November 2015 Update. These shortcomings relate to a lack of rules and details on how clawbacks are to be apportioned and dealt with if more than one adviser is involved with the same client during the clawback period or if an adviser moves licensee during the clawback period.
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