ASIC launched a new instrument cementing the maximum amount of fees and ongoing commissions advisers can charge on life insurance products as part of industry-wide reforms.
The Life Insurance Commissions Instrument will cap advisers' commissions and clawback or repay amounts back to clients if a policy is cancelled within the first two years.
Effective 1 January 2018, the commission cap and clawback amounts will reduce the incentives for advisers to provide inappropriate advice to clients, ASIC deputy chair Peter Kell said.
"ASIC is warning advisers against inappropriately switching clients into new policies prior to this commencement date where this is not in their clients' best interests," Kell said, noting a post-implementation review will commence in 2021.
The instrument is a by-product of the life insurance reforms announced by the Government in November 2015 and sets in motion the effects of the Life Insurance Remuneration Arrangements Act passed by Parliament in February.
The law, which extends to the direct sale and marketing of life insurance states commissions, will be capped at 60% of the premium in the first year of the policy from 1 January 2020, with a maximum trailing commission of 20% of the premium in all years.
Advisers must return 100% of commissions if the policy lapses within the first year, and a 60% clawback applies if it lapses in the second year.
Some of the concerns industry members raised include: how increases in the cost of the policy or premiums after the first year should be dealt with, and how the clawback arrangements apply if the maximum upfront commission is applied to premium increases in the first or second year.