Life insurance remuneration draft regulations released

In brief

The Government has released an exposure draft of the Corporations Amendment (Life Insurance Remuneration Arrangements) Regulations 2016. The draft regulations provide some further detail to support the implementation of the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016, which is currently before the Senate. Partner Michelle Levy and Senior Associate Georgia Cleeve report.

Introduction

As we have previously written about (in our Client Update: Life insurance advice remuneration legislation released), the Government has released (and looks likely soon to pass) the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016 (the Bill) which is intended, in the words of the Government, to 'better align the interests of providers of financial advice in the life insurance sector with consumer outcomes'. As we previously noted, it is incorrect to say that the Bill 'removes the current exemption in the Corporations Act from the ban on conflicted remuneration for benefits paid in relation to certain life risk insurance products'. This is also true of the Corporations Amendment (Life Insurance Remuneration Arrangements) Regulations 2016 (the Draft Regulations), which expand the exemptions set out in the Bill in a number of ways. The Government expects the Bill and Draft Regulations to commence on 1 July 2016.

Recap on the Bill

The Bill will remove the current exception from the conflicted remuneration rules for benefits given in relation to certain life policies. In place of this exception, the Bill introduces a number of other exceptions that allow benefits that would otherwise fall within the definition of 'conflicted remuneration' in respect of life risk insurance products, to continue to be paid. In short, such benefits will only be permissible if one of the following is met:

• The benefits are level benefits which do not change, as a proportion of the amounts paid for a policy or policies, throughout the life of the policy or policies (including renewal periods).
• The benefits meet requirements, set by ASIC:
  1. relating to the ratio of the benefit to the first year's cost for a policy (and to its renewal costs); and
  2. under which the recipient must repay all or a specified portion of the benefit if, in the first two years, the policy to which it relates is cancelled or the cost of the policy reduces.
• The benefits are grandfathered, which the Bill says will be the case if:
  1. the relevant policy is issued before 1 July 2016; or
  2. the policy has been applied for before 1 July 2016 and is issued by 1 October 2016.

The Draft Regulations

The Draft Regulations further expand the exceptions in the Bill.

The first change is that the 'policy cost', which is relevant to determining the ratio of the cost of the policy to a commission, includes stamp duty payable on the death benefit component of a policy. This is an interim measure that will only apply for 12 months, to enable industry to make the necessary IT updates.

Secondly, the Draft Regulations provide that clawback will not be required in order to rely on the ratio and clawback requirements exemption in certain circumstances. Those circumstances are:

• where a policy is cancelled in the first two years either because the insured:
  1. commits suicide
  2. commits an act of self-harm;
  3. reaches an age at which the policy expires; or
  4. oddly, isn't described correctly due to an administrative error, and
• where the policy cost is reduced in the first two years either because:
  1. there is a reduction in the risk to the insured's health (the Explanatory Statement gives the example of a reduction in premiums because an insured has stopped smoking); or
  2. a rebate is paid or discount is applied to induce the insured to acquire or renew the insurance policy.

Thirdly, the Draft Regulations state that grandfathering arrangements will be applicable to benefits paid under remuneration arrangements between an employer and an employee. The period of grandfathering differs depending whether or not the employee is under an enterprise agreement or collective agreement-based transitional instrument and, if so, when that is set to expire.

Where an employee is covered by an enterprise agreement immediately before the Bill and Draft Regulations come into force (currently expected to be 1 July 2016), and the 'nominal expiry date' for the agreement has not passed, the employer can continue paying what would otherwise be 'conflicted remuneration' to the employee until six months after the nominal expiry date.

For other employees with a 'remuneration arrangement' with their employer (presumably, an employment contract), the employer can continue paying 'conflicted remuneration' for up to 12 months after the commencement day (ie the grandfathering will apply until 1 July 2017).

Finally, the Draft Regulations also grandfather benefits paid in respect of policies that are acquired by exercising an option given to an insured under a product the insured held immediately before commencement of these new rules. The example in the Explanatory Statement is one where a customer elects to take up an option to acquire term life coverage where that option was part of a policy the customer held immediately before the Draft Regulations came into force.

Next steps

Each element of the Draft Regulations expands, rather than narrows, the circumstances in which benefits may continue to be paid in relation to life insurance. While this will be welcome news to many, to the extent that you have any concerns about the Draft Regulations, the closing date for submissions is Thursday, 28 April 2016.