Financial advisers can pocket a commission of up to 130 per cent for recommending a client switch life insurance policies. According to critics, this leads to widespread 'churning' of policies. The Turnbull government plans to introduce reforms, but they will come too late for one alleged victim.
Rocco, a 40 year old Sydney IT consultant, is a victim of churning, say his lawyers. Churning' is when a financial adviser switches clients from one life insurance policy to another to pocket lucrative up-front commissions, which can be as high as 130 per cent of the premium. While this practice is lucrative for the adviser, it can have devastating consequences for the insured.
In late 2011, when his wife was expecting their first baby, Rocco was advised by his new financial planner to replace his long-held income protection and trauma policy for another, supposedly more comprehensive one.
A few months after he signed up for the new policy, Rocco was diagnosed with lymphoma. After several months of chemotherapy, his vision deteriorated. He is now permanently blind.
Unable to work full time, he claimed his lost income on his new policy and was paid until December 2014, when his insurer suddenly voided the policy.
His insurance company, AIA, alleged that Rocco had failed to disclose a GP referral for a lump on his neck in 2011. Rocco says he had had simply forgotten about it in the chaotic days surrounding the birth of his child.
Because the policy was less than three years old, the insurer was able to void the policy over the innocent non-disclosure, even though Rocco maintains it was not relevant to his ongoing disability.
'If I had stuck with the first income protection policy I'd still be covered today,' he says. 'That would be a major benefit to me as I've suffered ongoing sickness and injury and I have not been able to get back into work as much as I would like to.'
Rocco's lawyer, Josh Mennen of Maurice Blackburn, says that under Rocco's previous policy, the insurer would have had to prove that he had deliberately failed to disclose the GP referral or engaged in fraudulent behaviour.
The onus of proof would have been be on the insurer, in other words. Mennen says he's in no doubt that Rocco's predicament is linked to 'conflicted remuneration' in the life insurance industry.
'If you are a financial planner and a client comes to you and you tell them their current insurance arrangements are fine, then you are not going to make a commission on that business,' Menenn says.
'But if you are able to replace their old policy with a new one you have recommended as their adviser, then you stand to receive some thousands of dollars. That conflict has led to the notorious practice of churning.'
Gerard Brody, chief executive of the Consumer Action Law Centre, says the bill is an 'important first step' but he would prefer to see all commissions banned. Commissions always work to encourage advisers to act in their interest rather than in the interests of the customer. We would much rather see advisers offer a fee-for-service, which would reduce that conflict.'
Rocco, meanwhile, is not waiting for a change in the law. He is seeking redress in the courts against AIA and the planner who put him in the new policy.
