Brokers finally have clarity on commissions and disclosure. But NIBA’s code shuffle casts a shadow

By John Deex

Hayne calls for general insurance commissions review” was the headline in early 2019, as Kenneth Hayne’s royal commission final report was published.

Then followed four years of soul searching on broker remuneration, disclosure, and the Insurance Brokers Code of Practice.

Last month’s changes to the latest version of the code mark the end of the process – for now at least. Where the industry has ended up maintains the status quo for the most part, with some important tweaks along the way.

Our 2019 headline referred to Hayne’s recommendation for the recently completed Quality of Advice Review, which looked into – among many other things – whether the general insurance exemption to the ban on conflicted remuneration should continue.

Reviewer Michelle Levy consulted widely and consumer groups led the charge for brokers to move away from commissions altogether. But Ms Levy – while not a fan of the commission model – ultimately decided that removing it would do more harm than good.

“In a perfect world, there would be no commissions at large – not only on financial products or insurance products – but we don’t live in a perfect world,” she told Insurance News last year.

“I think that if brokers aren’t paid commission, they won’t be in business and they won’t be providing advice at all.”

In allowing commissions to continue, she did include an important caveat – that written client consent is obtained.

In advance of the Quality of Advice Review, the National Insurance Brokers Association (NIBA) was reviewing its code of practice. It decided to get ahead of the game, and contingent remuneration was outlawed.

“When acting on a client’s behalf we will not receive any contingent remuneration including volume-based commissions or profit-sharing arrangements or preferential remuneration (such as overrider commissions from an insurer),” the code says.

Crucially, in April last year, it also extended section 6.1 of the code, which deals with remuneration disclosure, to include small business as well as retail clients.

Section 6.1 then said: “If a client is an individual or a small business and we are acting on their behalf, we will provide them with information about any remuneration (including commissions) or other benefits we will or expect to receive as a result of providing covered services.”

There was an unanticipated and angry response from some brokers – not all of them small players – who pointed to the added complexity that including small businesses could cause, and the impact it could have on systems and processes.

The code was due to be implemented by November last year, but the implementation of 6.1 was delayed for another 12 months while further consultation took place. At that point NIBA Chief Executive Phil Kewin said he expected 6.1 would eventually come in as it stood.

However, earlier this year the Quality of Advice Review final report was published and the Federal Government accepted its recommendations, including those on commissions, and in July NIBA made another announcement.

The reference to small business in 6.1 was removed and the disclosure requirements once again restricted to retail clients.

NIBA said consultation with members showed that including small businesses made things more complicated and added “limited value”. It also said the Quality of Advice Review had focused on retail clients and therefore so should that section of the code.

So why extend it in the first place? It seems that while the pressure was on commissions, NIBA felt the need to go beyond the law and get ahead of the game on disclosure.

But some members reacted badly, and with the future of broker commissions apparently secured, and no particular scrutiny on small business clients, NIBA decided to change the focus of the code’s disclosure requirement back to retail customers only.

In many ways it makes sense. Wholesale clients, who can in theory take care of themselves, are not given the same protections in law as retail clients. There’s a view that NIBA does not need to take on the role of regulator, with its focus being the interests of its members.

Despite all this, there’s a straightforward question that won’t go away: why are some brokers so opposed to declaring commissions to small business clients?

Ms Levy thinks they should. She tells Insurance News her views on disclosure and consent around commissions also extend to small business, and disclosure should be the “default position”.

“The fact that my recommendations are limited to retail clients is because that was the scope of the terms of reference – not because I thought a lower standard should apply to wholesale clients.”

Expert industry consultant John Trowbridge says commissions earned by brokers should always be disclosed to commercial clients – as he recommended two years ago.

In 2021 Mr Trowbridge completed a report on commercial insurance for the Insurance Council of Australia (ICA), looking at ways to improve the affordability and availability of cover.

One of his recommendations was that commissions continue, but that “brokers disclose on all customer quotes and invoices as part of the premium all insurer commissions and any other payments they will receive from the insurer”.

The ICA endorsed all Mr Trowbridge’s recommendations, and he told Insurance News that he stands by his findings.

“Nothing has changed since then that would alter my view of the situation,” he said.

“I don’t see any particular reason why commercial customers, especially smaller ones, should be considered different from retail customers.”

Some brokers share this view – believing intermediaries should have more confidence in the value that they bring and the professional service they provide.

And consumer groups continue to fight against commissions, having been unimpressed by NIBA’s code change.

“We are disappointed that insurance brokers have taken this step to wind back commitments already made under the Code of Practice relating to disclosure of commissions,” Financial Rights Legal Centre Chief Executive Karen Cox said.

In response, NIBA points out that the original version of the new code that was consulted on with consumer groups did not include the small business aspect, which was introduced later (and then removed).

It says small businesses do qualify as retail clients if purchasing retail products, and also adds that many brokers disclose commissions to small business clients of their own volition.

After years of uncertainty, the completion of the Quality of Advice Review and the finalisation of the current NIBA code draws a line under the issue, for now.

But with influential voices still not entirely on board, it’s a fair bet broker remuneration – and its disclosure – will be raised again at some point in future.