Australia’s Treasury Department has
issued a consultation paper calling for comments on the proposed
rationalisation of life insurance products and managed investment
products. This proposal, noted the Treasury, was developed through
discussions with a range of stakeholders, including product
providers, actuaries and legal experts.
In its formal definition of its objective, the
Treasury explained that product rationalisation is a process of
converting or consolidating products of a similar nature into a
single product with equivalent features and benefits. The objective
of the process is to remove economically inefficient legacy
products by transferring beneficiaries into new, more efficient
products. Superannuations are excluded from initial consideration
of product rationalisation.
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To implement the rationalisation, the Treasury
has proposed a legacy product test that would require that the
product has firstly been closed to new investors/policyholders for
a period of two years and satisfies at least one of a number of
prescribed criteria. For each of these criteria, an objective test
would be prescribed for demonstrating compliance.
According to the Treasury the criteria and
objective tests are:
• The product has become uneconomic for
policyholders or members. The objective test demonstrating this
could, for example, be that the total number of the product holders
at the date the application for a rationalisation occurs is 50
percent less than the largest total number of product holders over
the course of the life of the product;
• The product provider has incurred a net
operating loss on the product to be rationalised over the past two
preceding financial years; or
• The product has become out of date because
of changes in the regulatory regime. The specific test
demonstrating this could, for example, be that any holder of the
product receives a lower after-tax return or a lower social
security benefit as a result of a regulatory change that affects
the product or the costs of operating the product have become
excessive for the product provider.
Indicative of the potential extent of the
product rationalisation, The Investment and Financial Services
Association has estimated that the total amount of funds under
management in legacy products may amount to A$221 billion ($197
billion), or about a quarter of total funds under management.
Australian financial
institutions have until 26 February 2010 to respond to the
consultation paper.
