David Whyte
A Final Word on Trowbridge LIF is upon us, and a retrospective gnashing and wailing is not particularly helpful. But it should serve as a warning for the future – as Santyana observed: “Those who do not remember the past are condemned to repeat it”.
The publication of the Trowbridge Report in Australia contained proposals that were destructive, and anti-competitive.
Creating an extreme position on compensation structures may well have been a negotiating tactic, but the outcome of adopting the LIF measures, driven by the so-called ‘findings’ in the Trowbridge will have a negative impact on the personal risk protection industry in Australia.
This will, in turn, disadvantage the wider Australian community to the detriment of the public purse, enterprise, families, and individual Australian citizens.
This article is not written in support of high commission levels, nor does it seek to justify the various reward structures that prevail in Australia and New Zealand.
In the main, financial advisers in Australia and NZ serve the public well, and stakeholders in the NZ financial services industry have rejected the recommendations of the Trowbridge report.
In Australia, the prescriptive regime and adversarial nature of the regulatory bodies will merely drive dishonest practitioners to invent ever more ingenious ways of bilking the public.
And if you think the Australian regime has been effective in making markets more secure for Australian citizens, ask the victims of the recent Commonwealth Bank and Macquarie Bank scandals how they feel.
And don’t think Australia escaped the GFC unscathed. Capital + Merchant, for example, had their Australian operation in full swing under the Cymbis Finance banner, and stitched up Australian citizens just as effectively as did their NZ counterpart.
So much for a “rules-based” regulatory environment.
But ignoring the effectiveness of the Australian regulatory environment for now, and looking at the lead up to the Trowbridge Report, there was a discernable pattern of behavior that should be of deep concern to all Australian and NZ financial services industry stakeholders.
ASIC produced “Report 407 – Review of the financial advice industry’s implementation of the FOFA reforms” in September 2014. The research for the report was conducted by ASIC between September 2013 and July 2014. From the arbitrarily filtered research sample of 749, a mere 80 licensees were approached, and only 60 participated – out of a total of 5,100.
These licensees embrace an individual adviser population of 9,918.
To measure accuracy and validity, researchers use confidence interval calculations. These are really only valid when a truly random sample of the relevant population is accessible.
However, if we give ASIC’s methodology the benefit of the doubt for illustration purposes, to be confident that 95% of the licensees would produce the same results (with a 5% margin of error), the sample size would need to be 357.
The sample selected produces a margin of error of 12.5% – the generally accepted margin is between 4% and 8%. This fundamental flaw in the research leaves the statistical integrity of the research open to question.
There are therefore aspects of the representative nature of the research that are at best suspect, at worst dubious and/or statistically not significant, accurate, valid, or reliable. ASIC published “Report 413 – Review of retail life insurance advice” in October 2014.
The research concluded that 37% of the 202 files reviewed from 7 licensees, representing a total adviser sample of 79 individuals, contained advice that failed to meet the relevant legal standard. In this research, the concepts of accuracy, reliability, and statistical significance based on random sampling were completely abandoned.
Taking 202 files from 79 advisers (out of a total population of 18,000 according to the Ripoll Report), representing 7 licensees (out of a total of 5,100 on the ASIC database), is, quite simply, of no meaningful significance.
Put simply, there was no statistical evidence to suggest that the Australian financial advisory industry indulged in widespread ‘churn’ or malpractice. Subsequently, a Life Insurance and Advice Working Group (LIWAG) created by the Association of Financial Advisers (AFA) and the Financial Services Council (FSC) was instructed to develop an industry response.
As it turned out, not all submissions to the LIAWG were made public – whither transparency? And there were parties that gleefully alit upon ASIC’s flawed research.
The Trowbridge Report from the LIWAG was nothing more than a response to the blatant political pressure being exerted to “do something”.
An indicative proclamation at the time by Assistant Treasurer, Josh Frydenberg, that threatened Federal Government intervention was evidence of this pressure.
Mr. Frydenberg’s reference to “poor levels of compliance highlighted by ASIC” stemmed from the flawed research previously mentioned.
So the “something” that Trowbridge took aim at was the commission levels available to financial advisers recommending life risk products to clients.
Despite the presence of risk product options on all Superannuation and Industry platforms, Australians remain steadfastly underinsured, as reported by KPMG in 2014 and by Swiss Re in 2007.
Adopting LIF based on the measures recommended by Trowbridge will render many business models uneconomic, cause a move away from non-aligned advice, and bolster the market position of vertically integrated organisations that both manufacture and distribute risk products.
Consumers will suffer a reduction in choice, access, and availability of any semblance of impartial advice as these vertical organisations dominate the market by pushing their in-house proprietary products – “in the best interests of the client”.
So there are obvious consequences for consumers in diluting the viability of some independent adviser business models. But there are wider issues at play here which contain warnings for the future of the industry.
LIF/Trowbridge-style measures are anti-competitive as they penalize cost-efficient organisations that can contain expenses by attracting market share through the use of leading-edge technology and product development.
If a product provider’s business model has a heavy new business dependency (and which new life company doesn’t?) why should they be prevented from allocating expense within the premium structure to stimulate the required new business flow?
If pricing and product quality become uncompetitive, the market will react accordingly – as it did in the 1990’s in NZ when the market share previously enjoyed by the mutual life offices was successfully challenged in NZ by Sovereign’s arrival, product innovation, and subsequent success.
This success was fuelled by (then) radical product design, innovative technology, and an unshakable belief that great service would bring great results.
The company gave advisers and their clients a choice, something the mutual life offices singularly avoided doing at the time.
And ultimately, the mutual companies paid the price – consumer sovereignty prevailed.
So in addition to exacerbating the underinsurance problem in Australia and NZ, the idea of mandated commission levels works against consumer choice.
Adviser organisations and companies that draw their support from advisers need to be more vigilant, vocal, and vociferous when faced with such ill-considered measures.
Repeating the mistakes of history is a costly and sometimes fatal exercise – the financial adviser industry on both sides of the Tasman needs to be wary of ignoring these lessons.
By David Whyte, Chairman
