Commissions for life insurance advisers could soon be capped to stamp out unethical practices in the industry.
A report into the insurance industry by former banking regulator John Trowbridge recommends adviser commissions be capped at 20 per cent of a policy's annual premium, or $1,200 for premiums under $2,000.
The Initial Advice Payment (IAP), available to the adviser when a client first takes out a life insurance policy, should only be available once every five years, it says.
"High upfront commissions give advisers an incentive to write new business. The more premium they write, the more they earn," Mr Trowbridge said.
"There is no incentive to provide advice that does not result in a product sale or to provide advice to a client that they retain an existing policy unless the advice is to purchase additional covers or increase the sum insured."
Industry Super Australia deputy chief executive Robbie Campo said commission fees for issuing new life policies will continue to "undermine the quality of advice and insurance outcomes for clients."
"A transition towards phasing out commission-based remuneration is the only long term sustainable solution," she said.
"Other options, such as allowing capped commissions only up to the value of advice provided, do not seem to have been seriously considered."
The financial advice sector has been rocked by scandals in recent years by revelations advisers have pocketed high commissions for putting clients' funds in high-risk products without their knowledge or consent.
The report makes six policy recommendations relating to financial policy advice and life insurance.
It also recommends life insurance advisers be banned from receiving payments from insurers that conflict with their duty to put clients' interests first.
That move is designed to prevent the insurer influencing the adviser's product recommendations.
Mr Trowbridge's report comes after the failure of self-regulation, and a scathing assessment by the corporate regulator that found an "unacceptable level of failure" within the industry.
The financial service industry body has welcomed the recommendations.
"The industry needs to absorb Mr Trowbridge's recommendations and consider the complex, interrelated issues," Financial Services Council chief executive Sally Loane said.
"Our aim is to ensure more Australians have access to quality advice and are covered for their most valuable assets."
TROWBRIDGE REPORT POLICY RECOMMENDATIONS:
1. Limit the number of payments advisers receive for signing a new policy, which is also known as the five-year rule
2. There be a three year transition for the five-year rule to be applied
3. Licensees be prohibited from receiving benefits from insurers
4. Ensure competitive access to and choice of all available life insurance products
5. All insurers, in conjunction with advisers, re-examine their culture, behaviours and practices regarding advice given to clients
6. A life insurance code of practice be developed, modelled on the General Insurance Code of Practice
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