The Australian assistant treasurer, Kelly O’Dwyer (pictured), has introduced legislation into Parliament that calls for a three-year phase-down of up-front commissions that investors pay to advisors.

The Government is hailing the legislation as consensual in nature, saying that it stems from an 'agreement' that it reached about the way to make the necessary changes. If past British practice is anything to go by, the regulator might have applied pressure to bring such an agreement about. It has long talked of the 'conflicted' remuneration arrangements that were exempted under the Future of Financial Advice (FOFA) reforms for life insurance.

Life insurance advisors are paid high up-front commissions of up to 120% of the first year's premium, with low trailing commissions after that. This, the Government thinks, can provide a financial incentive to advisors to replace policies even when consumers do not benefit.

These important improvements will commence on 1 July 2016. They include:

• a three-year phase-down of up-front commissions paid to advisors to a maximum of 60% from 1 July 2018 onwards, together with the introduction of a maximum rate for continuing commissions of 20%; and
• the introduction of a two-year commission ‘clawback’ period, which will extract 100% of a commission in the first year and 60% in the second year, should a policy lapse.

The Australian Securities and Investments Commission conducted a review in 2014 which postulated such a rule. The Government will consult interested parties about the regulations that ought to support the new law. ASIC will, if all goes well, administer the commission caps and clawback arrangements and will conduct some sort of analysis in two years' time to see whether the reforms are working. If not, the Government plans to "mandate level commissions."