The Federal Opposition will not support a formal ban on product commissions, should any of the industry inquiries and reviews currently underway recommend such a move.
The Shadow Treasurer, Joe Hockey, told the Financial Planning Association of Australia 2009 National Conference in Melbourne that no ban would be necessary anyway, if financial planners have an explicit fiduciary obligation to clients.
“I want to give you this commitment today: The Liberal Party will not support the banning of commissions,” Hockey said.
“We will not do that. And we will not do that because, for many businesses, those commissions are a part of the revenue stream of the business.
“However, we have through FSR and on an ongoing basis, always opposed secret commissions. And we have opposed secret commissions because your clients, the people you serve, ultimately should know whether your advice to them may be influenced by the remuneration provided by a financial institution.
“This is a difficult area to go in, I understand that, and I recognise the good work that the FPA in relation to this. It is a difficult area.”
Hockey said a fiduciary responsibility to clients would eliminate many of the conflicts of interest, both real and perceived, in the industry just as effectively as a ban on commissions, but would achieve it without the need for additional legislation which could have unintended consequences.
“[An] area of great interest to me is whether financial planners should have a fiduciary obligation to act in the best interests of their clients, rather than in the interest of a financial institution,” Hockey said.
“This, again, is slightly contentious, particularly for those financial planners who might be closely affiliated to a financial institution.
“If you have a fiduciary obligation to act in the best interests of the client, then I would argue that that in many ways discounts the need for reform of commissions, or the significant reform of commissions. Because ultimately, you will have a legal obligation to put your clients fist. And if you should put the interests of your clients second, through a commission, then the legal penalties are extreme.
“In having that fiduciary obligation, you are by law – if not in common law already – you are by explicit law, by black-letter law, required to put your clients first.
“That may well be something that you as a profession may welcome.”
Hockey said that even though the Liberal Party opposed formally banning commissions, moving away from such payments was part and parcel of financial planning becoming a profession. The likelihood of higher educational standards would also help, he said.
“This is where financial planners become part of a profession, and to become part of a profession it doe require a higher level of educational standards – and I know you’ve been working on that, and that is important, although I must say, it’s not a panacea. It’s not going to be a silver bullet that ensures that you are beyond criticism.
“But the better the educational standards become…the higher the regard the community will hold financial planners in. The tougher it is to become a financial planner, the more likely people will be to go to you for expert advice.
“And if they’re confident they will get a consistent level of good advice, they will pay for it. They will pay upfront.
“I am concerned about those most vulnerable, those who may not have the money readily available to pay a fee upfront fee, for advice. Maybe there are ways around this. Maybe there are ways you can provide upfront advice for a fee, but still agree with the client to receive an ongoing commission.
“Ultimately, from a Liberal Party perspective we want you to determine the best way forward which at the same time protects the best interests of your customers.”
Hockey urged the financial planning community to present a united front on these issues and to seize the opportunity to change for the better.
“As a Minister for nine years, I often found those industries that were prepared to take their destinies into their own hands were the industries that often flourished. Those industries that were weak and divided were the industries that you needed to regulate the most.
“Ultimately consumers need to be reassured. They need to be reassured that the person that they are dealing with is honest, open and transparent.”
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