Royal Commission recommendations miss the mark for business
On 4 February 2019, the Australian Government’s Royal Commission into the Misconduct in the Banking, Superannuation and Financial Services Industry Final Report was released (Report).
Many of the 76 recommendations arising from the Commission’s investigations pertain to consumer-based services and products (across banking, finance and insurance). However, there are impacts on business insurance policies which have not been addressed.
There appears to be a lack of trust in Australia’s financial system with particular emphasis on the banking sphere. The current challenge in the industry is on increased transparency and accountability.
In this article, we consider the implications the Report has on the provision of general insurance services. The immediate benefit to business is limited at best.
Overview of the Report
The Commission was tasked with inquiring into, and reporting on, whether any conduct of financial services entities might have amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations.
Four observations arising from the Report are:
- the connection between conduct and reward;
- the asymmetry of power and information between financial services and entities and their customers;
- the effects of conflict between duty and interest; and
- holding entities to account.
It is important to note that Commissioner Hayne QC primarily focused on the conduct by the financial services sector with consumers and small businesses rather than mid-large corporate business.
How does the Report impact on the provision of general insurance advice?
Part 3.2 of the Report considers Recommendations regarding providing financial advice. In particular, Recommendations 2.3 and 2.6, outlined below, impact the provision of general insurance services.
Recommendation 2.3 – Review of measures to improve the quality of advice:
In three years’ time, there should be a review by Government in consultation with Australian Securities and Investment Commission of the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice.
The Government has introduced reforms to enhance the quality of financial advice, in particular, the reforms to increase the educational, training and ethical standards of financial advisers.
Recommendation 2.6 – General insurance and consumer credit insurance commissions:
In addition to the measures outlined in Recommendation 2.3, the Government should also consider whether each remaining exemption to the ban on conflicted remuneration remains justified, including:
- the exemptions for general insurance products and consumer credit insurance products; and
- the exemptions for non-monetary benefits set out in section 963C of the Corporations Act 2001 (Cth).
While this is confusing at best, the bottom line is that Mr Hayne QC is suggesting that premium commissions of any nature (life or general insurance) are inherently conflicted forms of remuneration for brokers as it compromises their core function of acting purely on behalf of their clients.
Mr Hayne QC believes that the broker should be paid by the consumer for their advice, not the provider of the financial product (bank/insurer/financial institution).
The Report suggests that as part of the recommended review by 2022 (which the current government and opposition have adopted) into the quality of financial advice, these commissions should be capped or removed altogether unless a compelling case can be mounted for them to be retained.
In the meantime, mid-large businesses should not expect to see significant reform from the Royal Commission until post 2022, at least in relation to commissions and insurance advice.
McCullough Robertson together with Allegiant IRS continue to provide clients with a transparent and accountable lawyering and brokerage experience.
This non-conflicting business model keeps our client’s objectives and business needs as priority.
As per the expected findings of the Report, we continue to charge our services on a clear and upfront fixed-fee basis rather than taking commissions hidden within the premiums charged by insurance companies.
While we acknowledge the importance of, and embrace the significance, that the Report has on Australia’s financial sector with respect to small businesses, more needs to be considered for mid-large corporate businesses.