The Morrison government has announced it will fast-track its response to the Hayne royal commission, in what Treasurer Frydenberg called the largest financial services law reform package in three decades. By mid-next year, the government expects to have 90 per cent of its reform commitments completed. The announcement is sure to put more pressure on the decisions advisers are making about their futures, particularly those AMP aligned advisers who are effected by AMP recent decision to reduce what they are willing to pay for advice businesses under their Buyer of Last resort (BOLR) agreements.
Legislation has been introduced at the start of this month to end grandfathered commissions for financial advisers by 2021. It's been estimated this change alone could reduce some advisers annual revenues by up to 30%.
Challenge To Grandfathering Changes
The changes to grandfathering of commissions will affect many advisers and put a dent in their revenue and the AOIFP has even engaged a law firm to challenge the changes in the high court, citing Section 51(31) of the Constitution, which states that the Commonwealth has the power to make laws with respect to "the acquisition of property on just terms”.
They argue the federal government can take a person’s property, such as varying payments derived from their contractual arrangements with product manufacturers, but they must be fairly compensated.
ANZ alluded to the argument last year during the Royal Commission, warning that any government seeking to use legislation to end grandfathered arrangements might "encounter constitutional difficulties" and said the government could end up having to compensate an army of advisers for removing an important part of their livelihood.
Justice Hayne pre-empted the argument in his final report in February stating “Whenever change is mooted, someone will suggest that changing the permitted forms of remuneration would lead to constitutional difficulties because it would amount to an acquisition of property otherwise than on just terms…(but) First, where would be the acquisition? Who would acquire anything? What proprietary benefit or interest would accrue to any person?”
Australian National University College of Law associate professor Ron Levy was quoted as saying the case had “little chance” of succeeding because the Commonwealth was not gaining from the eradication of the commissions and was entitled to regulate an industry.
Adviser Numbers To Decrease
Other challenges to the governments legislative agenda have come from the Financial Services Union (FSU), who told politicians the fallout from regulatory overreach would reduce adviser numbers and make it harder for average Australians to get advice.And are now lobbying against the tough new education standards.
Financial Planning Association CEO Dante De Gori is on record as saying the new education standards under FASEA could see adviser numbers fall by up to 40 per cent by 2024.
Advisers industry wide are trying to come to terms with the changes being introduced and are re-evaluating whether they can maintain their positions with increases to compliance costs and decreasing revenues. Grandfathered commissions alone are estimated at $1.5 billion to $2 billion a year– that will no longer go to advisers.
AMP Limited’s group executive, advice, Alex Wade recently told Money Managementthat AMP was looking at advice businesses future capability and that they would identify and support businesses that are capable of digesting the industry disruption and re-structuring for the future.
Fewer than 50 per cent of AMP aligned practices are believed to making recurring revenue of less than $200,000 and AMP believes that single operator practices in this bracket will be increasingly challenged by the cost of office space, back office staff and rising compliance costs.
AMP’s new strategy centres around the belief that many Australians needs for financial advice will be serviced through digital, phone and web-based advice channels. Where this leaves many hundreds of “underperforming” advice firms is seemingly – out of business.
Criticism of AMP’s changes to it’s BOLR arrangements to its advisers has continued. Speaking to Fairfax media, Seaview Consulting director Bob Neill said that while smaller financial planning practices were usually valued between 2.4 and 2.8 times their revenue, the "disappointing" aspect about the AMP situation was that advisers had been operating in a "cocooned" environment where they had been encouraged to buy-in with promised exit prices that "were never market prices". Regarding AMPs debt funding of advisers, he said "They were actively pursued and encouraged to participate, so I think the management of AMP has a bit to answer for in promoting a fairytale that at some point had to end. You can’t have something that defies market forces forever."
While this observation is an easy enough one to make in hindsight, the real world outcome is far from a fairytale for many of the advisers concerned.