'We see no harm': reviewer stands firm on commissions

Quality of Advice reviewer Michelle Levy says that in a “perfect world”, there’d be no commissions – in the sale of general insurance, or just about anything else.

But in an illuminating interview with insuranceNEWS.com.au, Ms Levy explains why she has so far resisted the increasingly fierce calls from consumer groups to ban commissions and wipe out the conflicts that they bring.

As insuranceNEWS.com.au has reported, Ms Levy released a proposals paper in late August, outlining her plans to make advice more accessible and affordable by applying personal advice more broadly and replacing the “best interests” obligation with a “good advice” duty.

She followed that up this month with a paper on conflicted remuneration, recommending that commissions stay in general and life insurance, but that written consent is obtained from the client in some circumstances.

After the 2018 royal commission hearings, Kenneth Hayne demanded that the exemption for general insurance in the ban on conflicted remuneration be looked at – but Ms Levy says there was no presumption that commissions should go.

“I was looking at, do [commissions] serve any purpose from the perspective of consumers and with respect to arrangements where personal advice is given, which is where the greatest harm I think could be,” she tells insuranceNEWS.com.au.

“We really, in general insurance, see no harm. There is no evidence that they are causing harm. And there is evidence that people actually like commissions. It’s convenient.

“I thought, is there a good reason to undo something that doesn’t appear to be causing harm? I don’t think a case was made to make a change in the context of general insurance.”

Ms Levy says she is concerned about commissions, from a moral perspective, and she understands why consumer groups don’t like the conflicts that they bring.

But that isn’t enough in itself for her to recommend a ban.

“I do see why the consumer groups oppose commissions. You ask why, and they talk about it introducing conflicts, and that’s obvious.

“But then you say, well, is the conflict hurting anyone? And that’s the real question. In general insurance in particular, I don’t think it is. I haven’t seen evidence that is.

“In a perfect world, there would be no commissions at large – not only on financial products or insurance products – but we don’t live in a perfect world.”

Despite some dissenting views, Ms Levy has taken on board the line from the National Insurance Brokers Association (NIBA) that access to advice would be reduced if commissions were banned.

She also recognises the value that brokers bring.

“I think that if brokers aren’t paid commission, they won’t be in business and they won’t be providing advice at all. So that’s where I come to this harm versus good.”

Ms Levy says that where brokers are providing personal advice to retail clients, written consent to receive a commission must be provided.

She hopes this “modest” recommendation will not only ease concerns about transparency, but also open up discussions about alternative fee-for-service models.

She says the consent would not need to be sought repeatedly, just “at the beginning of the relationship”.

The range of commission would be disclosed in a client agreement, and commission earned would be listed each year on an invoice.

“It’s not an ongoing requirement every single time you write something, it’s not intended to be an onerous obligation, but it is intended to have a conversation and an element of honesty.

“At least the person has the opportunity to think oh, ok, there’s a commission. What does that mean? Do I want to pay a commission? Would I rather pay a fee for service?

“So that’s what is intended to happen. I completely acknowledge that in many cases, the person will hear it, they won’t pay any particular attention to it. But it’s better than not knowing.”

Ms Levy says her overall proposals, beyond the conflicted remuneration aspect, are designed to introduce greater diversity – “more advice, more forms of advice, and more ways of paying for advice”.

“The good advice duty for me is the expansion of personal advice, and I think that is really important in general insurance.

“I think it will make a really large difference to consumers, because general insurers in particular, are distributing products using general advice.

“This will force a lot of them to give personal advice, which means they need to think about, who am I speaking to? Am I speaking to somebody in in far north Queensland, and therefore should they have this kind of cover?

“They should actually be giving advice about that takes into account that person’s circumstances.”

Ms Levy understand that pushing more into the sphere of personal advice might raise the compliance burden, and along with it the cost of insurance.

“I expand the definition of personal advice, at the same time as I adjust the duties that are attached to it,” she says.

“Now I understand in general insurance, those duties are not as onerous perhaps as other financial products, advice, but they’re there.

“I’m not even sure they’re well suited to the nature of the advice and product that’s being recommended. So what I am looking at is a duty of good advice, which is intended to be better, more fit for purpose.”

Back to broker commissions, Ms Levy says she’s aware that other reports – perhaps most notably the Australian Competition and Consumer Commission (ACCC) study into insurance affordability issues in northern Australia – have recommended a ban.

She says she respects the ACCC, but cannot understand the logic. “It was not clear to me why they did recommend [a ban],” she says.

She does not believe it would achieve the aim of cutting the cost of insurance.

“I mean, it’ll be cheap, because you won’t have it. I respect the ACCC highly, but they actually didn’t have a case.”

Ms Levy is now working on her final report, which must be presented to government by December 16.

What is in the report, and what the government decides to act on, remains to be seen.

But on commissions, Ms Levy’s mind appears made up.