The Banking Royal Commission’s final recommendations have missed a golden opportunity to address the issues associated with vertical integration, says PPS Mutual CEO, Michael Pillemer.
Referring to the Royal Commission’s ‘root and branch’ investigation into the structural flaws within the sector, Pillemer has acknowledged the Royal Commission’s final report has much merit, with big banks and insurers coming under increased scrutiny.
Following the release of Commissioner Hayne’s recommendations, however, Pillemer says in a statement that “I fear the Commission’s recommendations are confined to pruning the branches only, leaving the root of many problems essentially untouched.”
Pillemer says he is perplexed as to why Commissioner Hayne did not address what Pillemer refers to as structural conflicts inherent within vertically integrated businesses. According to Pillemer, many of the issues impacting Australia’s life industry can be traced back to the demutualisation of the major life companies during the 1990s. “Mutual life insurers were owned by their policyholders – they did not have any shareholders,” he says, adding, “Once demutualised, and ASX-listed, shareholder interests took precedence.”
He argues, “It is the fundamental misalignment of shareholder interests with customer interests overlaid with the vertically integrated business model that has been the root cause of most of the scandals and problems identified in the Royal Commission,” and asserts that by not addressing these structural conflicts, “…a golden opportunity has been missed.”
Pillemer has also taken aim at the Royal Commission’s stance on the future of life insurance commissions (see: Government to Consider Mandating Level Commissions…). He says risk commissions have been a soft target: “I understand that advocating for commissions in the current environment is not a popular view. But in my considered view, a commission deducted from premium is just another remuneration method that gives greater assurance that the client will take out the insurance.”
He continued, “Under the recently introduced life insurance reforms, …the caps are the same for all insurers, so there is no conflict or incentive to place business with one insurer over another. In addition, advisers are bound by a best interest duty to their clients and disclosure provisions to ensure transparency.”
Pillemer also asserts that reducing the commission caps will do nothing more to protect advised clients. “All it will do is damage small business advisory practices and result in fewer Australians receiving high-quality insurance advice,” he said.
February 13, 2019