The Life Insurance Framework in its current form still has some loopholes and unintended consequences that are contrary to its intended aims, according to a leading lawyer.
Principal lawyer for imac legal & compliance, Ian McDermott, explores in a LinkedIn post the proposed removal of the licensee exemption from the ban on conflicted remuneration.
The explanatory memorandum of the bill states that the intended effect of the exemption removal is that “all benefits paid in relation to life insurance, whether offered inside or outside superannuation, are subject to be ban [sic] on conflicted remuneration”.
Mr McDermott said the memorandum “isn’t strictly true”, since benefits paid within the prescribed benefit ratio and clawback requirements will still be exempt under section 963B of the Corporations Act 2001.
“Pre-existing policies will effectively be grandfathered, although it must be said that this creates its own conflict as advisers would have an incentive to write policies to existing clients so they can earn an upfront commission as well as higher ongoing commissions from the new product,” he said.
“This is a strange outcome for legislation that is supposed to do away with such conflicts.”
Mr McDermott said the initial intention behind the changes was so all insurance providers, advised or non-advised, would be subject to the conflicted remuneration rules.
However, he said the current drafting of the draft regulations is legally “more than a little concerning”.
“Most troubling of all is the fact that the conflicted remuneration rules which, up until now, have applied only where advice has been provided to a retail client will also now apply even if there has been no advice provided,” Mr McDermott said.
“Under the proposed laws, benefits paid could be conflicted remuneration if they are paid in relation to life insurance advice, providing information in relation to life insurance or dealing ‘in relation to’ life insurance.
“No guidance is given on what ‘in relation to’ means in this context and the wording of the draft regulations doesn’t provide many clues.”