Last week, the government passed legislation through the House of Representatives to end the payment of grandfathered remuneration to financial advisers. The Bill proposes to end the grandfathering of conflicted remuneration paid to financial advisers by 1 January 2021 in line with the Governments’ response to recommendation 2.4 of the Royal Commission Final Report. It’s passage however, is not without its critics, and ASIC’s role in informing the legislation has also been attacked.
The Bill also contains provisions for a scheme under which amounts that would otherwise have been paid as conflicted remuneration are rebated to affected customers after 1 January 2021. It now just has to be rubberstamped by the Senate prior to becoming law.
Speaking to the passage of the bill, Treasurer Josh Frydenberg said “to support this legislation and to ensure that the benefits of removing grandfathered conflicted remuneration flow through to clients, the government has commissioned ASIC to monitor and report on the extent to which product issuers are acting to end the grandfathering of conflicted remuneration in the period between 1 July 2019 and 1 January 2021.”
AFA Criticises Legislation
The Association of Financial Advisers (AFA) and their chief executive Philip Kewin criticised the passage of the bill in its current form saying advised clients are now at risk of being subject to additional expense and/or losing access to their financial adviser.
The AFA has argued that a 3-year transition period is required to allow advisers time to find alternative solutions for clients impacted by grandfathered commissions. Kewin also warned that if product providers turned off grandfathering prior to the 2021 deadline, many advisers would be adversely affected, particularly those who had debt secured by grandfathered commission clients. "In many cases, turning off grandfathering before the legislated date will only serve to stop advisers being paid, the benefit may not be passed onto the client and the ongoing servicing will be left to the institution providing the product,"
"We are deeply disappointed at the lack of analysis on the impacts of this reform and the lack of communication and guidance for impacted clients and advisers. At this stage there will be many thousands of cases where a sensible solution is simply not available," Kewin said.
Politicians Attack ASIC
Although the government has committed to passing the legislation, several coalition MP‘s have attacked the ASIC on several fronts, including its submission to the Hayne Royal Commission regarding potential client disadvantage from grandfathered commissions, saying that the regulator had no comprehensive idea about the situation before it had begun collecting data as a result of a recent instruction from the Treasurer, Josh Frydenberg.
The criticism, which occurred in evidence to the Parliamentary Joint Committee on Corporations and Financial Services.
Liberal backbencher, Bert Van Mannen, asked if ASIC knew that there were complex issues around client disadvantage it would have been prudent for ASIC to have recommended a longer transition period for the ending of grandfathering rather than the “short transition period” it did actually recommend.
ASIC deputy chair, Karen Chester, who was previously deputy hair of the Productivity Commission (PC) told the joint committee that much more work had been done by the PC which had identified the extent of grandfathered commissions and which had then been used as a resource by the Royal Commissioner, Kenneth Hayne.
The same Parliamentary JC went on to attack ASIC’s decision to appeal a landmark case against Westpac, which alleged the bank had broken responsible lending laws hundreds of thousands of times by relying on the Household Expenditure Measure benchmark, instead of their customers' actual expenses.
ASIC had been widely criticised during the Royal Commission for their “softly, softly” approach to regulation and have been given extra funding by the government. They have vowed to be more aggressive in their regulatory activities as a result.