Exorbitant initial payments that tempt financial advisers to book profits ahead of clients' interests need to be scrapped, according to a working group chaired by former Australian Prudential Regulation Authority member John Trowbridge.
Financial planners should be allowed to pocket commissions when providing complex life cover advice but rewarding them with lucrative advance payments of 100 to 130 per cent of the first year's insurance premiums should be axed.
That is one of the findings of an interim report, spearheaded by the Financial Services Council and Association of Financial Advisers to look at the state of Australia's beleaguered life insurance industry.
"I am offering a view that nil commission won't work, and the other one is that the high upfront commission of more than 100 per cent of the first year's premium, we're ruling that one out too," Mr Trowbridge, the independent chairman of the report, said.
"We're saying that's not appropriate to continue."
Two months ago, the corporate watchdog issued a damning report on the life insurance industry after finding that more than a third of advice given by planners was shoddy and motivated by expensive commissions.
Churn, which is when financial advisers move their clients from one insurer to another in order to book fatter commissions, has been prevalent in the sector.
Australian Securities and Investments Commission deputy chairman Peter Kell said undercover surveillance had revealed an "unacceptable level of failure", and that it should consider itself "on notice".
The regulator has threatened the life industry with an increase in prosecutions following the abysmal results.
"There is sufficient dissatisfaction with current arrangements to dictate that the 'no-change' extreme [on adviser remuneration] is not acceptable. At the other end of the spectrum, a no-commission arrangement has not been actively considered in this interim report," according to the FSC and AFA document.
The research also follows recommendations from the Financial System Inquiry, which urged the federal government to alter the laws to make initial commissions costs to be no more expensive than continuing commissions.
"This would reduce incentives for churning [swapping customers to get highercommissions] and improve the quality of advice on life insurance," the final report, released earlier this month, said.
About nine in 10 advisers recommending life insurance are paid high initial commissions, plus 10 to 13 per cent of annual premium in following years.
Mr Trowbridge, who is also a former chief executive of Suncorp Group, is seeking submissions from parties throughout the industry to address questions on quality of advice, remuneration structures, and insurer practices, before tabling the final report in March.
He is hoping the final report would yield potential models for self-regulation, despite the problems plaguing the sector.
"ASIC has really thrown down the gauntlet to the industry by putting on a set of recommendations out on what needs to be done, but without any indication of how it may be done," he said.
"It is important that consumer trust and confidence in financial advice and life insurance products is strengthened," FSC chief executive Sally Loane said.