Retail life insurance and approved product lists
6.1 Approved Product Lists (APLs) are used by advice licensees and advisers
selling life insurance to maintain a list of life insurance products that they
have available to sell. APLs are also used for providing financial advice. This
chapter examines issues arising from the use of APLs when they are used for
providing financial product advice in relation to life insurance. The chapter
begins by summarising what APLs are and how they are used. Evidence received
during the inquiry that raises issues with APLs is then discussed. The chapter
concludes with the committee's views and recommendation for reform.
The nature of APLs
6.2 An APL is a pre-selected product list maintained by an AFS licensee,
which contains the range of financial products that advisers can sell. APLs are
not mandated by the Corporations Act or ASIC regulatory policy but are commonly
used throughout the industry. The best-interests duty does not prevent or
require the use of APLs. However, satisfying the best-interests duty with
respect to the use of an APL would depend on how the APL was used. At this
juncture, there are no standards or requirements for the number of products or
product issuers that must be represented on an APL. In other words, an APL may
contain products from only one insurer or a large number of insurers.
6.3 In its submission, ASIC noted some of the potential benefits of an APL:
- APLs are often used by AFS licensees and their representatives as
a risk management tool to assist licensees in meeting their legal obligations
when providing financial product advice;
- APLs may facilitate the provision of higher quality or better
value products if the quality of the products is assessed before their inclusion;
- APLs may reduce the risk that information provided to consumers
is incorrect, because APLs limit the number of products that advisers need to
6.4 Nonetheless, ASIC also observed that, in order to act in a customer's
best interests, an adviser may need to consider products in addition to those
on their licensee's APL. ASIC's Regulatory Guide 175 (RG 175), sets out the circumstances in which
advisers are required to consider products that are not currently on their APL:
In some cases, an advice provider can conduct a reasonable
investigation into financial products under s961B(2)(e) by investigating the
products on their AFS licensee's approved product list.
In other cases, an advice provider will need to investigate
and consider a product that is not on their AFS licensee's approved product
list to show that they have acted in the best interests of the client when providing
them with personal advice, for example:
- if the client's existing products are not on the approved
product list of the advice provider’s licensee and these products might be able
to meet the client's relevant circumstances;
- if an approved product list used by an advice provider is
restricted to one class of product and there are products that are not in that
class that would better meet the client's relevant circumstances, considering
the subject matter of the advice sought by the client; or
- if the client requests the advice provider to consider a
specified financial product that is not on the approved product list of the
advice provider's licensee.
6.5 RG 175 states unambiguously the obligations that the best-interests duty
places on an adviser with respect to an APL and the provision of client advice:
If an advice provider is unable to recommend products outside
their AFS licensee's approved product list, and they need to do this to meet
their obligations in Div 2 of Pt 7.7A, the advice provider must not provide the
6.6 The effectiveness of APLs was considered in the 2015 Trowbridge review.
That review noted that licensees operate an APL that contains a selection of
life insurers from among the 13 providers that serviced the retail life
insurance market at the time of the review. Some licensees use as few as one
insurer while other licensees have an 'open architecture' approach that lists
all 13 insurers.
6.7 The Trowbridge review noted that in order to ensure quality advice is
provided to consumers and that competition between life insurers flows through
to consumers, the industry needs to strike a balance between a licensee's
desire to limit its APL so as to contain administrative costs and the need for
advisers to meet the obligations to their clients.
6.8 The Trowbridge review identified the following issues with APLs:
- Limited APLs unnecessarily restrict competition and can prevent
advisers from offering their clients access to a broad range of life insurance
products and services. While advisers can request to go outside the licensees APL,
doing so can be time consuming and difficult. As a result it is common for
advisers to stay within the APL for most of their recommendations.
- Limited APLs also create incentives for advisers to push products
that can lead to consumer detriment. Courts have noted that limited APLs
fundamentally fail to meet the objectives around the provision of advice in a
client's best interest. A recent example is (Commonwealth Financial Planning
Ltd v Couper 2013,) where it was found the advice was incomplete due to the
role played by a very narrow APL.
6.9 The Trowbridge review recommended that APLs in the retail life insurance
advice sector should include at least half of the authorised retail life
insurance providers and be prohibited from receiving benefits from insurers and
potentially influence advice.
6.10 ASIC agreed that the Trowbridge recommendation could lead to
improvements in the industry. ASIC submitted that expanded APLs may address the
following risks that are associated with narrow APLs:
- Lower quality/poor value products—Advice providers who can only
recommend a limited number of products from an APL will be less able to give
quality advice which complies with their conduct obligations if the products on
the APL are too restricted, not suitable, or of poor quality.
- Conflicts of interest—APLs that favour products issued within the
vertically integrated group will not allow effective management or avoidance of
conflicts of interest, which can lead to poor outcomes for consumers.
- Lack of innovation—APLs that are too narrow or static may prevent
consumers from accessing new and innovative products with features that are
better for them.
6.11 However, ASIC also informed the committee that expanded APLs would not
be a sufficient reform by itself to improve the quality of advice, because:
- advice providers operating within a vertically integrated group
tend to recommend in-house products over non-related products even where their
APL includes a wide range of non-related products;
- a wider APL may not protect consumers from the poor outcomes that
can result where the adviser has a conflict of interest; and
- the drivers of poor quality retail life insurance advice also
include adviser incentives and failure to consider the relationship between life
insurance and superannuation.
6.12 In November 2015, the Government announced as part of the LIF Reforms
that industry would be responsible for widening APLs through the development of
a new industry standard.
6.13 The FSC noted in its November 2016 submission to this inquiry that it is
currently developing a life insurance APL Standard to encourage high standards
in life insurance APL construction practices that support quality consumer
6.14 In April 2017 the FSC released a draft standard for life insurance APLs
for consultation until 10 May 2017. The FSC is seeking to finalise the standard
in the coming months. The FSC indicated that the standard:
- is intended to be compulsory for all FSC members once approved;
- requires a reasonable basis for APLs to be formulated with the
best interests duty in mind;
- requires life insurance APLs to contain a choice of multiple life
insurance providers and to be supported by robust off-APL processes so
alternative products can be recommended; and
- would encourage disclosure of how many products and providers are
on the APL.
6.15 At an ASIC Oversight hearing in October 2017, ASIC confirmed to the
committee that it is 'looking at how APLs work in practice and whether advisers
do use the full range of products on approved product lists'.
Arguments supporting the use of APLs
6.16 The FSC suggested that APLs are an important element in the advice
process that facilitates the delivery of advice based on quality researched
products for licensees and advisers. Licensees review and assess products for
inclusion in an APL for advisers to offer their clients. APLs serve as a risk
management tool for advisers and licensees whereby products have been assessed
for suitability prior to being included on the list. The FSC argued that this
facilitates appropriate products being recommended to clients. The FSC noted
that the development of APLs commonly involves assessments of experience with
underwriting, claims and other services which are likely to impact the customer
or adviser experience.
6.17 MLC informed the committee that, in its view, APLs function as a way for
licensees to manage risk by supporting their recommendation with products that
have undergone qualitative research. Further, MLC argued that because an APL
ensures products meet agreed minimum standards and are issued by a reputable
manufacturer, they function to protect both the advisor and their client. In
addition, if the products on an APL do not suit the specific needs of a
customer, most licensees have a process in place to gain approval for the use
of an alternative, non-APL product.
6.18 At a hearing in March 2017, Mr Brad Cooper, Chief Executive Officer of
BT Financial Group (BT), confirmed that BT only has their own life insurance
products on the APL used by their financial advisers.
6.19 Mr Cooper explained how a vertically-integrated business with such a
narrow APL meets the best interests test under the FOFA regulations. In
particular, Mr Cooper noted that BT has very highly-ranked products
tailored to the needs of their customers, as well as an off-APL process whereby
advisers can select a competitor's product as necessary:
Perhaps I can explain for a moment about the APL and how that
…and how we use that to ensure that we deliver on that best
interests test. Our salaried financial advisers work for our group.
Predominantly their customers are customers of the bank. You would imagine that
we know those customers very well and we use our knowledge of those customers
in making sure that the development of our products suits the vast majority of
those needs. By way of example, our products are one of the only products that
would have income protection for homemakers; it is one of the only set of
products with a SME segment that has a key personal insurance policy that
covers the revenue at risk to the business if that person was ill. So there are
a range of covers that our products have that others do not.
As I said earlier, IRIS rates our product No. 1 in six out of
eight times and it is second on the other two. Both Investment Trends and
Strategic Insight also rate our product No. 1 in the market. In the vast
majority of cases, our product is most suitable for those customers, and that
is the product on our APL. But we do recognise that it does not meet every
circumstance. So we have what we call an off-APL process that, if one of our
advisers meets a customer and they do not believe that our product meets that
customer's best interests, they can use a competitor's product that is not on
our APL. In 2016, our advisers did that over 1,200 times, which was one in 20
of our claims, and they used some seven providers off the APL. I am the
licensee, if you like, of the AFSL and I am responsible for meeting that best
The way we do that for our customers of our salaried
financial advisers is by making sure that, where appropriate, they use the
products that we know well and which are best suited for the customer. When
they choose to go off that APL, we have a process where it goes into our
research team and we are making sure in those circumstances that the ultimate
product better meets that customer's requirements.
6.20 In November 2017, BT announced that it intended to add other insurers to
its APL by March 2018.
Arguments for widening or banning APLs
6.21 The committee received a substantial body of evidence that argued for
increasing the number of life insurance companies, and the number of
non-affiliated products, represented on an APL as a matter of some urgency.
6.22 Berrill & Watson Lawyers suggested that mandating a minimum number
of insurance companies to be included in APLs would have the advantage of substantially
diluting the ability of advisers to guide clients towards particular products for
6.23 Clearview argued against APLs as, in its view, APLs result in a 'pay to
play' model which enables many product manufacturers to effectively buy access
to advisers and distribution. Shelf space and other fees mean that the products
on these restricted APLs are not necessarily the best products available, nor would
they necessarily be best-suited to the customer's needs.
6.24 Clearview advocated for open APLs to be a regulatory requirement if
industry failed to immediately move voluntarily to open APLs. Clearview
acknowledged that the FSC had a process underway, but was critical of the time
6.25 TAL supported further reform of APLs, suggesting that a requirement to
have a range of products and suppliers in any APL would return the focus of
such lists to being about quality and choice. TAL also supported the
introduction of a new APL standard to widen APLs.
6.26 AIA also supported the Trowbridge recommendation that APLs in the retail
life insurance advice sector should include at least half of the authorised
retail life insurance providers. AIA argued that the benefit of broader market
coverage in APLs is that it will increase the level of product choice,
competition, and consumer access to life insurance products. AIA suggested that
this will allow consumers to compare and select the best product.
6.27 ANZ informed the committee that it supports a minimum of three providers
being offered on APLs. ANZ advised the committee about the size of its APLs,
- ANZ Financial Planning has four providers on its APL, one of
which is OnePath; and
- ANZ dealers groups have nine providers on their APL, which also
6.28 Maurice Blackburn Lawyers (Maurice Blackburn) were critical of APLs,
noting that dealer groups utilising a vertical integration model are not
obliged to have any retail life risk insurance product on their APLs other than
their own affiliated product. Vertically-integrated advice is where an adviser
recommends purchase of a financial product (including life insurance) from
entities with which they are associated. This is often to the exclusion of more
suitable non-affiliated products. Maurice Blackburn suggested that this
inherent conflict has given rise to much litigation in recent years, the most
notable case being Commonwealth Financial Planning Ltd v Couper. Maurice
Blackburn noted that these inherent conflicts were highlighted by Roy Morgan
research which stated that over a three year period, these dealer groups
allocated an average of over 70 per cent of their sales to their own products.
6.29 Maurice Blackburn argued that the recent LIF Reforms have not addressed
the issues arising from APLs, suggesting the Explanatory Memorandum to the
Corporations Amendment (Life Insurance Remuneration Arrangements) Bill 2016
(the Bill) did not discuss these issues directly nor propose any substantive
reform. Maurice Blackburn suggested that potential reforms could include a requirement
- APLs include a balance of affiliated and non-affiliated products,
and/or a minimum proportion of non-affiliated products; and
- if affiliated products are recommended, the affiliation should be
disclosed, and the customer should be given a comparison with non-affiliated
6.30 The Australian Lawyers Alliance argued for a legislated solution
informing the committee that the government previously entrusted the industry
with responsibility for widening APLs through the development of a new industry
standard. The ALA suggested that a passive response is inappropriate given the
industry's poor track record of self-regulation and its manifest commercial
interest in continuing to sell in-house products.
6.31 The Association of Financial Advisers informed the committee that
reduced licensing fees have been used by licensees to incentivise advisers to
select narrow APLs over boarder APLs, further compromising an adviser's
capacity to meet their best interests duty.
6.32 The committee received evidence from Mr Stephen Perera, Director of
advice firm Perera Crowther, who advocated banning the use of APLs within
retail life insurance primarily because an APL is used to manipulate
distribution and money flows by artificially restricting choice for no discernible
APLs are used among AFSL holders to control distribution of
insurance products where they (the AFSL) have profit share arrangements.
The above-mentioned behaviour is particularly concentrated
among vertically integrated AFSLs. By way of example, one vertically integrated
AFSL excludes over half of the insurers that currently manufacture Life
APLs inhibit choice for consumers for the benefit of AFSL
holders who are interested in meeting their Key Performance Indicators to meet
their volume based bonuses.
There is no benefit for consumers to retain APLs.
6.33 A large body of evidence to the inquiry recommended substantial reform
to the way that APLs are currently constructed and used. As discussed in both this
chapter and the previous chapter with respect to shelf space, education, and
training fees, the committee received evidence that the way APLs operate lacks
transparency and generates conflicts of interest that lead to mis-selling, that
is, selling a life insurance product on the basis of misleading advice.
6.34 The risks of mis-selling arise from the potential for APLs to be used:
- to herd customers to the insurer that is prepared to pay the most
to be on the APL; or
- to herd customers to in-house products through vertically
6.35 The committee notes that the following recent developments could address
some issues with APLs:
- the Trowbridge recommendation that APLs must contain at least
half of the authorised retail life insurance providers; and
- the draft APL standard developed by the FSC.
6.36 In spite of these recent developments, the committee has the following reservations:
- firstly, the relationship between the APL standard and the Life Insurance
Code of Conduct is not clear;
- secondly, the draft standard may only cover FSC members who hold
AFS licenses, thus leaving out many other industry participants; and
- thirdly, the voluntary self-regulatory nature of the standard
means it lacks rigor and enforceability.
6.37 The committee is particularly concerned about the risk of conflicts of
interest that arise when an APL is used as the basis for giving financial
product advice. In this situation, a customer should be able to expect that the
advice they are given is independent, genuinely in their best interest, and has
not been influenced by deals and secret payments to get a product onto an APL.
6.38 The committee considers that, in order to satisfy the Future of
Financial Advice (FOFA) best-interests test, an adviser must be able to select
products from a broad APL that contains a balance of non-affiliated products,
and freely give, without encumbrance, financial product advice that may include
a recommendation that the best product for a customer is a product that the
adviser does not sell.
6.39 In this regard, the committee notes that BT, a vertically-integrated
life insurance business, appeared before the committee and confidently asserted
that their own in‑house products are ranked the best on the market and,
on that basis, they see no need to stock any other products on their APL. The
committee accepts that a business may indeed be capable of producing the best
products on the market for a year or even for a few years. But it stretches
credulity that a company would be able to do so indefinitely. As a corollary,
therefore, a question arises as to how a vertically-integrated business that
only stocked its own products on its APL could meet the duty to act in the best
interests of the client under the FOFA regulations on an ongoing basis. In
other words, it may be possible for that business to meet the FOFA requirements
for a year or even several years, but it seems unlikely that such a business
arrangement could be deemed to meet the best-interests duty indefinitely. The
committee is not persuaded that the ability to occasionally select an off-APL
product is sufficient to counter-balance the hazards of continuing to maintain
such a narrow APL.
6.40 The committee notes the arguments of some industry participants that
APLs reduce risks by removing poor quality products. However, the committee is
not convinced that restrictive APLs influenced either by vertically integrated
arrangements or by a secretive array of shelf space fees, and various other
fees such as training fees, are the best way to protect consumers from poor
quality products. Indeed, the committee has heard many persuasive arguments to
the contrary from a range of consumer groups that the prevalence of hidden fees
that shape APLs are detrimental to consumers because consumers may end up being
sold an inferior product merely because a life insurer has paid a fee to enable
that product to be put on an advice providers shelf.
6.41 In light of these circumstances, the committee considers that, as
currently configured, APLs are severely lacking in transparency. At a bare
minimum, an APL should have a balance of affiliated and non-affiliated
products, and if affiliated products are recommended, the affiliation should be
disclosed, and the customer should be given a comparison with non-affiliated
6.42 Beyond this, however, the committee is not convinced that the draft APL
Standard being proposed by the FSC will adequately address the full range of
concerns articulated by the committee in this and the previous chapter. The
committee is of the view that the life insurance industry should be
transitioning to open APLs. The committee considers that the advantages of open
APLs in terms of transparency and improved consumer outcomes far outweigh any
risks to consumers.
6.43 While the committee is prepared to allow the industry some flexibility
in making this transition, the committee draws attention to Recommendation 5.2
from the previous chapter in which the committee recommended that ASIC conduct
a systematic review and risk assessment of all payments and benefits (monetary
and non-monetary) flowing between participants in each sector of the life
insurance industry with a view to advising the government of any outstanding
risks and regulatory gaps.
6.44 Based on both the findings of that review and the extent to which
industry has taken the initiative to move towards open APLs, the committee
suggests that the government may like to consider whether further regulation in
this space is required to enforce greater transparency and improve consumer
6.45 The committee recommends that the life insurance industry should have,
as a matter of urgency, a balance of affiliated and non-affiliated products on
their approved product lists, and if affiliated products are recommended, the
affiliation should be disclosed, and the customer should be given a comparison
with non-affiliated products. Beyond this, the committee further recommends
that the industry transition to open approved product lists.
6.46 The committee observes that the manner in which APLs have been
configured may potentially breach competition laws. The committee therefore
considers that it is appropriate that ASIC and the ACCC jointly investigate
whether the past use of APLs in the life insurance industry breaches any
competition laws they administer including, but not limited to,
6.47 The committee also considers that the report of the above joint investigation
should also inform government whether the current legislation inappropriately
constrains the capacity of ASIC or the ACCC to investigate anti-competitive
behaviour in the financial service sector, including life insurance.
6.48 The committee recommends that ASIC and the ACCC jointly investigate
whether the past use of APLs in the life insurance industry breaches any anti‑competitive
laws they administer. The report of the investigation should also inform
government whether the current legislation inappropriately constrains the
capacity of ASIC or the ACCC to investigate anti-competitive behaviour in the
financial service sector, including life insurance.