Loopholes rife in amended LIF bill


By Sarah Kendell

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The updated life insurance framework (LIF) legislation now before Parliament failed to deal with a number of potential issues that could arise under the new commission rules, including if an adviser changed licensees during the two-year clawback period and if clients were incentivised through rebates from their adviser to hold a policy for two years, according to a leading industry law firm.

In a recent blogpost, imac legal and compliance principal lawyer Ian McDermott said the Corporations Amendment (Life Insurance Remuneration Arrangements) Bill, which had been amended from its original form before being reintroduced to Parliament late last year, still contained several surprising loopholes with regard to the proposed two-year commission clawback period for advisers.

While advisers would not be subjected to commission clawback if a client policy lapsed within two years because the client died, self-harmed or reached an age where they became ineligible for the policy, they would not be exempt from the new arrangements if they changed licensees during the two years, nor if they acquired a new client from a different adviser, McDermott said.

“The LIF rules contain clawback provisions but give no regulatory guidance as to how those rules are to apply when, for example, there has been a change of adviser and/or licensee between commencement of a policy and cancellation/clawback,” he said.

“The new rules do allow for ASIC to make rules that could cover such requirements … however, in imac legal’s view, given this is such an integral issue, appropriate rules should have been included either in the act or regulations.”

He said he was also surprised the government had not acted to close the loophole - that allowed advisers to incentivise clients through rebates or discounts to hold onto a policy for two years - in the amended version of the bill.

“It appears possible the clawback provisions may be avoided by merely engaging in an ongoing program of rebates to clients, no matter how minimal the rebate, so long as the rebate was applied in order to induce the client to acquire or continue to hold the product,” he said.

“The new LIF rules still allow this, as well as where a ‘discount’ is applied to the policy for the same purpose.”

Additionally, he identified that while the government had acted to eliminate the carve-out in the laws for direct insurance sales, it had failed to fully develop that part of the legislation, meaning any form of commission on unadvised insurance sales – even that which fell below the newly mandated level of 80 per cent as of 2018 – would now be illegal under the laws.

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