Cap and Clawback

Prepared by Peter Hagias

ASIC has set commission caps and clawback periods for life insurance products. The commission caps, which commence from 1 January 2018, apply to both initial and ongoing commissions received by advisers. The initial commission cap will be gradually reduced as follows:

Date policy is issued Commission cap
1 January 2018 – 31 December 2018 80% of the policy cost
1 January 2019 – 31 December 2019 70% of the policy cost
1 January 2020 – onwards 60% of the policy cost

Trailing commissions in subsequent years of the policy will have a commission cap of 20% of the policy cost.

The commissions will be subject to a clawback if the policy is cancelled within the first 2 years. That clawback will be 100% of the commissions received if the policy is cancelled in the first year and 60% if it is cancelled in the second.

Adjustment mechanisms apply where the policy cost is reduced or increased within the first two years.

While existing policies are grandfathered, financial advice is not a ‘set and forget’ process and so advisers may need to recommend product switches in the future to ensure they meet their best interests obligations.

** Note that the reforms will not apply to insurance products which pay level commissions.