Risk Insurance Commission’s and APRA’s quest for harmonisation

The FoFA proposed ban on conflicted remuneration does not currently extend to risk insurance, including life risk products and general insurance, on the basis that insurance has different features from investment products. Treasury is continuing to consult with industry and consumer groups on whether to extend the ban to risk insurance.

Arguments against extending the ban include:

  • the fact that insurance premiums are not funded by investment income
  • commissions cover the sale of a product and often the cost of claims and customer management
  • risk insurance products are short term and are usually renewed annually, and
  • the remuneration structures used are not complex – ie there is greater transparency.

Following the recommendations made in the Cooper Report about the availability and cost  of insurances sold through superannuation, the Federal Government has announced as part of its FOFA reforms that it will move to ban the payment of upfront and trailing commissions on any insurance sold through superannuation. The ban will apply to all insurance sold through superannuation from 1 July 2013. Currently, the ban will not apply to the same insurance products, such as life or salary continuance, sold outside of superannuation.

Banning commissions on insurance sold through super will reduce the premium payable but the cost of advice will need to be funded upfront by the consumer with the possible perverse consequence that consumers may ultimately find themselves paying more for their insurance in an environment where commissions are banned.

The objective of these proposed changes is said to be directed at improving the quality of advice and removing the risk of conflicted remuneration. For the life industry, the debate must surely be whether a proposed ban on commission structures will achieve such a desired outcome or whether a fee for service structure will result in less consumers obtaining advice about their individual situation which is likely to only exacerbate the issue
of under insurance in Australia.

It will take time to realise the impact that these changes might have on the efficiency of current distribution models, the cost of insurance and the consequent impact that might have on competition and available choice for the consumer.

In legislating for a ban on commission payments, the provisions must be clear and unequivocal so that industry can implement changes as efficiently as possible.

APRA continues to consolidate and harmonise the prudential framework

The Australian Prudential Regulation Authority issued a discussion paper in December 2010 on its proposed consolidation of the prudential standards for outsourcing, business continuity management (BCM), governance and fit and proper requirements that apply to authorised deposit-taking institutions (ADI’s), general insurers, life companies and authorised or registered non-operating holding companies (NOHCs) of those entities.

APRA intends to consolidate 12 prudential standards into four new cross industry standards to further harmonise the prudential framework.

The proposed consolidation will bring about some changes. Although, in the main, these do not appear to be significant, the proposed extension of the outsourcing and BCM requirements to authorised and registered NOHCs and Level 2 banking groups will invariably result in additional compliance costs. For example, it will be necessary to ensure that the boards of those entities are structured and operate in a way that satisfies the governance requirements. At a minimum this includes having the requisite number of independent directors, board committees and policy documents and charters. APRA also proposes that the new cross industry prudential standards will clarify that, where a board is permitted to elect to use group policies and functions in order to satisfy a particular prudential requirement, the board itself must approve such election. That choice must be explicit and appropriately documented.

Inconsistencies between the prudential standards will also be addressed so that:

  • independence requirements for auditors and governance requirements for auditors and actuaries will be harmonised regardless of the industry in which they operate
  • all APRA regulated industry sectors, and
  • internal auditors periodically review the BCM and provide assurances to the board, and be subject to the power of APRA to request an external auditor to undertake an assessment of a company’s BCM arrangements.

Draft prudential practice guides for the four cross industry prudential standards are expected to be released in 2011, after the final consolidated prudential standards are published.

APRA is consolidating these prudential standards to ensure where possible that identical behavioural risks across the four industry sectors are subject to identical prudential requirements which it believes will improve industry understanding of these requirements and in turn improve the ability of the regulator to supervise the relevant behaviours. APRA intends to finalise the cross industry prudential standards by 1 July 2011. It has called for any information about the impact the proposed changes will have on compliance costs and has also invited the industry to make recommendations as to other relevant regulations that should be improved or removed to reduce compliance costs.

1 Discussion Paper - Consolidating prudential standards: Outsourcing, Business Continuity Management, Governance and Fit and Proper, 22 December 2010
2 The 12 prudential standards that are proposed to be consolidated are those relating to outsourcing (Prudential Standards APS 231, GPS 231, LPS 231 and CPS 231, BCM (Prudential Standards APS 232, CPS 232, GPS