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.
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Comments9
"I have been both a self-employed and a Bank Adviser, in my opinion it is right to get rid of grandfathered commissions. These clients have been paying fees for years with no service at all in some cases. I currently work on a flat dollar based fee for service model with nil grandfathered commissions and clients are far better informed as to what they pay each year and fees are not not hidden away in %. Be honest with yourselves, if you call an existing grandfathered client and discuss moving them from Grandfathered % to Flat fee dollar based and they want to deal with you ongoing turn off the trail and setup dollar based ongoing advice fees, if the client accepts and pays then you have serviced them, if they say no and who are you then you have been getting paid off the back of their policy or fund then cop it on the chin as you have been ripping them off for years. Mortgage Brokers should also have their fees changed to upfront fee for service and get rid of the trail and churn."
Darren 12:44 on 19 Sep 19
"How does ongoing commissions between the product provider and the adviser are conflicted......if all providers pays the same percentages ….. we always disclosed commissions "receivable" at the beginning and subsequently at review time to all client which also have been used to fund part of their ongoing service, so without these payments (not an additional cost to the client) they then have to pay "more" for the service!!! Just a bunch of "USELESS" so call policymakers (ASIC and RC Hayne) making sweeping recommendations with no true understanding of the potential detriment to the end users. Speaking of conflicted remuneration.......how about the government spend more efforts in resolving how these bunch of useless policymakers are spending the tax payers monies.....luxury hotel stays, business class airfares, limo services etc etc...."
Honest Advisers 08:53 on 19 Sep 19
"I find the issue of 'grandfathered commissions' interesting and am not sure that clients will be better off. How do the product providers pay the commissions to clients. It could be a very expensive exercise and incredibly complex. Knowing how slow most of the product providers are in doing anything (apart from switching off commissions), I wonder if they have the systems to monitor these payments to clients? On another note, I am bewildered that trail commissions on credit products are not seen the same way. Our dear Treasurer was very quick to defend brokers before the election so that their remuneration model would remain unchanged. And this was after the RC high lighting that brokers receive fees for no service. There isn't an expectation that brokers need to provide any service so it's money for jam. They way brokers explain trail commissions is that they are deferred compensation for the work done. Perhaps they need to define what amount the feel they should be paid and then work out how long these deferred commissions should be paid. Wishful thinking. I guess the Government needs to keep the game going with ever more debt so there's little wonder why they don't want to affect brokers and their remuneration model."
Bob B 17:27 on 18 Sep 19
"HERE WE GO AGAIN grandfathered commissions were in fact a deal between the product manufacturer and the adviser ….. they had NOTHING to do with servicing the client...…………. and a smart adviser would have serviced clients helped along with these commissions...….. I have been around long enough , 36 years, well before this type of commission was thought of . There was NO written agreement that said it was for the servicing of clients.... It was there to keep the business on the books initiated by the product manufacturer. And a proactive responsible adviser would move that business if a superior product came along... unless of course legislation changed! "
john WALKER 16:46 on 18 Sep 19
"Once again I say this issue was comprehensively dealt with under FOFA legislation. The fact that Haynes could make such sweeping recommendations with no true understanding of the huge potential client detriment is not good enough. These products have a natural use by date. Ash D fund managers don't want any of these clients back regardless of balance. These clients are being left out on the cold. Remember there was no reduction in fees when they took off commissions on corporate super and the same will happen this time. This is killing businesses and advisers."
Mary-Jane 16:41 on 18 Sep 19
"Once again we see the monkeys running the zoo with little thought to the flow through effects on both the client servicing and, the adviser business offering and network who actually made arrangements with their clients for an approved fee for service model. what happened to clients being able to select how they pay for a service?? The big question can be raised, will this translate to a reduction in fees/premiums to the client and, how do you prevent the institutions from ramping them up again to improve their bottom line without truly offering a service to the client. A big touch of reality is needed by ASIC and the government looking to implement this change and i encourage both to speak with the network of real business people. once the industry slides, its difficult to reverse that trend. Ask the Brits!!"
Peter Alchin 15:12 on 18 Sep 19
"Do we have a definition of "grandfathered conflicted remuneration". If the remuneration was disclosed at the start and now subsequently annually and always used to fund ongoing service eg payments from annuity providers. Where is the conflict?"
Geoffrey S 15:04 on 18 Sep 19
"If they could ban commissions only on balances above say $75,000, this would be a good compromise for both the adviser and fund manager. Advisers could keep these clients on the books and stop fund managers from being lobbed with thousands of unwanted accounts it needs to service."
Ash D 14:32 on 18 Sep 19
"So rather than any meaningful resistance we're left to be begging for extensions to legislation that will send many advisers out of the industry. Kicking the inevitability down the road."
Tony H 15:46 on 13 Sep 19