ASIC targets vertical integration, product bias in life insurance submission

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Financial advisers inside the banks’ wealth divisions are biased towards selling the banks’ own life insurance products, the corporate watchdog has told a life insurance inquiry.

In another blow to the banks’ vertically integrated business models, which have been under pressure following a wave of scandals inside the banks’ wealth divisions, the Australian Securities and Investments Commission said it had observed a bias towards the sale of in-house life insurance even when banks included other products on their approved product list.

“Our regulatory experience suggests that advice providers operating within a vertically integrated group tend to recommend in-house products over non-related products,” it said in a submission to the inquiry.

“Approved product lists that favour [in-house products] will not allow effective management or avoidance of conflicts of interest, which can lead to poor outcomes for consumers,” it said.

An approved product list is a list of financial products that advisers can sell under a particular bank’s financial licence.

Melinda Houghton, an independent financial adviser who has previously worked for the big banks, said advisers were pressured into selling in-house products regardless of what was on the approved list.


“An adviser is doing what they’re told to do by senior management,” she said.

“They have targets they have to meet, and if they don’t meet those targets, they don’t get their bonus.”

An industry-sponsored report by John Trowbridge in 2015 recommended new requirements for product lists to include a broader range of products outside the bank.

But ASIC told the inquiry this would have a limited impact.

“This will not on its own improve the quality of financial advice and competition in the life insurance industry,” it said.

More than 80 per cent of the life insurance industry has upfront commission arrangements with advisers, according to the regulator.

ASIC says these upfront commissions are more likely to lead to poor quality financial advice.

“Where life insurance is distributed through financial advisers, remuneration arrangements can affect the quality of advice received by clients,” it said.

It has called on the government to beef up its powers in the sector to enable it to take broader action against unfair practices, including the power to fine insurers that have breached a duty of good faith.

​It has also called for public reporting of life insurance claims data and for insurance contracts to no longer be excluded from unfair contract rules.

The life insurance inquiry is currently before the parliamentary joint committee on corporations and financial services.