Commissions will be banned on risk products sold within superannuation funds from July 1, 2013, but risk products outside superannuation have escaped such a ban under a revised Future of Financial Advice (FoFA) reform package, released today.
Click the link at the bottom of this article to download a PDF of the FoFA Information Pack
Draft legislation enacting the FoFA reforms will not be released until after the middle of this year. The Government says there are still several issues on which further consultation is required.
The Government will press ahead with its controversial opt-in proposals, but require clients to reaffirm their desire to receive advice every two years, instead of the initial proposal to require them to opt in annually.
The Government will ban volume-based payments from all financial services companies and investment to dealer groups, authorised representatives and advisers. But crucially, it appears to have left unchanged the ability of fund managers to pay volume rebates to platforms.
And the FoFA reforms envisage a form of limited advice, “scaled advice”, that can be provided by financial planners, super fund trustees and accountants.
Soft-dollar payments of $300 or more will be outlawed, the only exception being when such payments support conferences, seminars and training where a set percentage of time is spent on education.
The FoFA proposals grew from the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Financial Products and Services in Australia – or the so-called Ripoll Report, for the chairman of the review, Bernie Ripoll.
Ripoll tabled his report in November, 2009. The then-Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen, released the first FoFA package on Anzac Day last year. A new information pack released today does not represent the final, definitive FoFA package, but gives a clear picture of how Government’s thinking has evolved.
Measures announced today by the Assistant Treasurer and Minister for Financial services and Superannuation, Bill Shorten, that differ from those announced last year include:
– A prospective two-year opt-in from July 1, 2012.
– A ban on upfront and trailing commissions for individual and group risk within super funds from July 1, 2013.
– A prospective ban on volume- or sales target-based payments from any financial services group to dealer groups, authorised representatives or advisers. This includes volume rebates from platforms to dealer groups.
– A prospective ban on soft-dollar payments of $300 or more from July 1, 2012. Professional development and administrative IT services may be exempted from this ban if certain criteria are met.
– A new form of limited advice, called “scaled advice” (advice about one area of an investor’s needs, such as insurance, or about a limited range of issues) which can be provided by financial planners, superannuation fund trustees, and accountants.
– Limited carve-out from elements of the “best interests” and conflicted remuneration proposals for basic banking products, enabling employees of Australian Deposit-taking Institutions (ADIs) to give advice on and sell their employer’s basic banking products.
– Further consideration to be given to whether the term “financial planner” or “financial adviser” should be restricted under the Corporations Act.
BANNING COMMISSIONS ON INSURANCE IN SUPER
The government says that it will ban upfront and ongoing commissions on risk insurance sold within superannuation funds, after considering the recommendations of the Super System Review (Cooper Review). It says the Cooper Review recommended that “insurance commissions within superannuation be prohibited as they have the potential to affect the quality of advice”.
It says its position is consistent with “the findings of the ASIC shadow shopping surveys that illustrate thate in case of poor advice, over half involved poor life insurance advice”.
“There are some unique features of insurance provided within superannuation,” it says.
“Fees and charges within superannuation come at the cost of foregone retirement savings and expenditure on insurance is tax deductable to the fund.”
The Government says it blieves the quality of advice will improve “as conflicted remuneration structures will be removed”.
“Consumers will have the freedom to pay for insurance advice, but won’t be charged for services they don’t receive,” it says.
“Accessing insurance through superannuation will remain attractive as preferential tax arrangements will remain.
“Those consumers who want alternative payment arrangements have the choice and flexibility of doing so outside the superannuation environment.”
HOW OPT-IN WILL WORK
Advisers must send an opt-in or renewal notice to clients no less than 30 days prior to the relevant anniversary date of the initial advice.
The notice must set out the fee that the client paid in the previous year and a description of the services they received, and must set out the fees that will be charged and the services that will be provided in the year ahead.
This notice must also make it clear to the client that they may opt out of their advice arrangements at any time.
An adviser may not continue to charge an ongoing advice fee if the client fails to respond to the notice, or if the client formally opts out. However, if the client does not respond, then ongoing advice fees may be charged for up to 30 days after the anniversary date.
And if the client fails to respond to an opt-in notice, they may no longer expect to receive services from the adviser, and the adviser’s liability for ongoing advice ceases. However, the adviser’s liability for advice given up to that point remains.
The Government says it will consult further with the industry to determine appropriate penalties for advisers who continue to charge ongoing advice fees without asking clients to opt in, or where clients opt out.
UPDATE ON STATUTORY BEST INTERESTS DUTY
The Government says the focus of the best interests duty will be on the actions and behaviour of the individual, not on the outcome or result of the advice provided. It says this duty should not be seen as equivalent to a trustee-style obligation on an adviser, because the roles of adviser and trustee are quite different.
A best interests duty does not necessarily mean that an adviser must give comprehensive, holistic advice to all clients, all the time. The Government says that “if the client’s needs indicate that only limited advice is necessary, the adviser is not obligated to provide holistic advice”.
In addition, an adviser is not necessarily required to have knowledge of every single product in the market in order to discharge the best interests duty.
Advisers will not be permitted to contract out of their best interests duty. If an adviser believes they cannot offer advice that is in the best interests of the client, them must decline to give any advice.
Ultimately, liability for complying with the best interests duty rests with what the Government describes as the “providing entity” – that is, in effect, the dealer group or licensee.
“The imposition of this liability on the providing entity ensures that the providing entity has the necessary incentives to create working conditions for their advisers that facilitate compliance with this duty,” it says.
However, individual advisers may be subject to administrative penalties, including being banned, if they breach their duty.
The Government says that a number of issues were raised after it had finished consulting on the best interests duty. It says it will “consider these issues as part of developing the legislation to implement this measure”. There will be a chance for further comment before the legislation is finalised.
INITIAL REACTION
The revised FoFA package initially drew a mixed response from the industry. The managing director of AMP Financial Services, Craig Meller, said in a statement that the statutory best interests test was welcome.
“[It] is consistent with the standards expected of other professions and will play an important role in enhancing consumer confidence in the financial advice profession,“ Meller said.
But Meller said AMP does not support banning commissions on insurance, including income protection and disability cover, sold within superannuation funds.
Meller said the proposal “goes too far and it is not clear what problem is being addressed”. He said the proposal was “bad public policy” that would “inevitably exacerbate Australians’ chronic level of underinsurance”.
“Without the encouragement and support of a financial planner many people do not appreciate the necessity to arrange adequate insurance,” he said.
“An unintended consequence of this policy is likely to be the transfer of a greater burden to taxpayers who will be required to meet the social costs of underinsurance.”
CLICK HERE to download a PDF of the FoFA Information Pack
18 responses to “Shorten modifies opt in; bans commissions on insurance in super”
Andrew
Paddo this just proves to me that you are not right or wrong and neither am I. The point is that the current system allows the adviser to choose the model to be paid under. It is not the model that is causing the underinsurance problem it is that there are too many advisers who do not give risk advice to their clients either because they find it too hard, do not have the skill set or simply find it unattractive. Why do you think that insurers are ramping up their direct TV and web based offers….because it is easy money for them perhaps? The proposal from the government to remove choices from how an adviser can be paid if risk is placed within super yet leave the current system as is for non super is totally illogical and will create far more problems than what it would fix.
Also please tell me honestly how your clients feel paying your FFS bill when they have been told either by you or by the insurer that they will not offer them any cover due to their health or pastimes or that your client does not wish to accept what the insurer may be offering to them?
I agree, creating an uneven playing field is illogical.
Re your question:
Declined cover (past-times or ill-health): we try to vet the clients position before we prepare advice. If the client has any type of condition/past-time, we seek in-principle confirmation from the underwriters. Still takes a bit of time but much less than if we went through the entire advice and application process to then be declined. In circumstances where the client goes through advice & application to then be declined, we discount the fee. Sure, we lose a bit, the client loses a bit, but it is the most equitable situation. Much better than you, as the adviser, taking 100% of the risk. If your client is declined, you don’t get paid at all if you rely on commissions.
Client refuses offered cover: we charge full fee as agreed with the client.
The banning of risk commission in super will only lead to insurance not being sold at all.
Unlike the investment side where clients can rate the value of your advice and are prepared to pay a fee for performance and good advice, whereas the risk premiums actually reduce your remuneration on the investment side plus clients may not be prepared to pay a fee outside super for a risk product inside super.
Unfortunately clients do not value insurance until a claim occurs.
As holistic advice is no longer required many financial planners will opt for limited advice covering investment planning only and ignore risk completely as it will be just too hard to justify a fee for service model.
All the government has achieved is to create more “Conflicts of Interest” by this proposal.
They would have been better served in introducing a flat level commission for all risk products both inside and outside super.
Flat commission would correct the conflict of interest and resolve twisting at the same time.
RE Self Managed Super Funds that owns property, can anyone tell me the difference between a general broker being paid a commission as an expense from the fund to insure the building and its contents and me receiving a commission for insuring the trustees? Why isn’t the commission for the general broker banned too? After all it’s being paid from the fund as an expense
Seriously how can the correct structure for someone’s insurance be applied when another level of “conflict” has just been proposed. Being paid for providing the extremely important insurance advice outside of super, compared with potentially not being remunerated if its set up inside? Is this the best thing for the average Australian working family??? I think not…the unintended consequence is the fact that these families who need it most, yet due to cashflow can only afford so much cover outside of super, now may not receive the right advice as advisers cant “afford” to service these clients as they currently do!
Mr Shorten, I have 100+ families still in their own homes following a major illness, injury or death to the major income earner who received enough funding from their “advised” insurance policies inside &/or outside of super. Going forward at least half of these families would not be a profitable client for me to see if this proposal gets up! Another unintended consequence, a longer line @ Centrelink & an overall negative impact on the Australian community.
Consider the number that will need to “draw” on their super under financial hardship anyway, as they will be underinsured!!! The only losers here are these hard working Australian families who nobody can afford to advise…
How about we legislate a pay cut for you Mr Shorten!!! Will you drop some staff & half of your clients???
This raises more questions than it answers! here are a few that spring to mind…
1. Will insurance for SMSFs also be included under the ban on commission (mostly being retail rather than group products in these cases)
2. To what extent are accountants going to be able to advise under the “single issue” advice model?
3. Given that advisers can no longer receive commissions on super investments or insurance, does this now mean that we will be relieved of the requirement to provide lengthy SOAs for advice in this area (these latest reforms effectively acknowledge that disclosure via SOAs is not working)?
4. How do you tell a client what fees they have paid if they were not your client but another adviser’s in the previous year and what purpose does telling them retrospectively what they paid actually serve?
5. How can the commentators possibly say that this is not going to add to the cost of advice? how many people do you think are going to feel the urgency to fill out a form committing them to ongoing advice fees and return it in time, even if it’s a postage paid envelope and all? The obvious solution will be invoiced fees at time of review (forget about all the middle/low income earners)
6. Of the last 4/5 insurance cases I have handled through super, they have all been complicated and involved much to-ing and fro-ing between doctors, underwriters etc. I know that none of those cases would have proceeded had the client had to pay for my work and advice, and they most certainly would not have proceeded had the client had to implement the advice themselves! How is that helping to address the underinsurance problem in this country? And if you think that this will mean lower premiums for insurance inside super then you would have to be extremely naive or a great idealist!
7. HNW clients will again be the winners in the insurance game being those who can afford to pay premiums for non super insurance. I thought the reforms were supposed to be helping all Australians?
As a small owner operator advisory business, I for one will be someone that will now be seriously considering whether it makes sense to continue in such a regulatory environment and I am sure that I will not be the only one!
Rebecca, whilst you have some valid points, I do question some (using your points):
3. That lengthy SOAs were required under the commission model is one proof of the need to change. Clients just did not understand the disclosures contained therein.
5. Correct – upon review, have the client complete the opt in paperwork. Shouldn’t be too hard if you have a committed relationship with a client. Not fool proof but shouldn’t be too difficult.
6. How many insurance cases have been an absolute breeze where there has been little required input from you yet you receive a nice big commission that is ongoing for little work? How many advisers recommend churning? Unfortunately, the pro-commission planners ALWAYS throw out the oh-so difficult cases, ignoring the fact that they have been paid hansomely for many, many simple cases.
We are a small business operator who has been working on an absolute, fee-for-service model since day 1 (over 5 years ago) – no commissions on anything including risk, mortgages, investments. It can work.
Chris
Paddo, please expalin in detail your current fee for service model for your insurance advisory services. Thanks
Paddo
Chris:
1. Hourly fee;
2. Ensure you have appropriate staff (admin) manage the application process.
In many cases, the FFS is about the same as the discount in the first year. Maybe two years. Thereafter, savings for the client.
Chris
Are you pure risk or do you use the same model for all advice?
It is hard to read a comment like “…an adviser is not necessarily required to have knowledge of every single product in the market in order to discharge the best interests duty.” and still expect the public to have faith in the financial advice industry. I wouldn’t have thought it possible to give advice on a person’s best interests without being aware of what products can serve those interests. You have just nailed the reason why the very vast majority of Australians are cynical about paying for advice.
My Doctor does not have knowledge of every drug on the market does that mean we should have no faith in him. Product is the end result of the planning process, Once needs and plan are established there would be many products that could fullfill this need and if planners had to be abreast of every single product they would have no time to spend on clients or other training. This is why we utilise research houses and use these to develop APL’s. Unfortunately those making the decisions on the future of financial advice remain ignorant of the process as do many that comment on it.
Paddo
And let the tears begin…
That advisers will have difficulty in selling a cheaper form of insurance.
That advisers will have difficulty actually valuing and articulating the value of their advice.
Perhaps now, with a more competitive product, Australians will get the right level of insurance.
And perhaps not Paddo as many Australians will not be able to afford to pay us under a fee for service basis?
Paddo
Well, according to the commission based salespeople, ordinary Australians can’t afford to pay for the commissions now, can they?
Andrew
Paddo the most recent consumer research (plus my straw poll of clients) says the majority of ordinary Australians prefer the current model where the adviser chooses the risk remuneration model. If you want to charge your risk clients under FFS and reduce their premiums then good on you. Having an out of touch minority government deciding that cutting out risk brokerage from super is going to be a good thing and magically result in the right levels of insurance as you put it is naive. It will actually result in a decrease to the levels of insurance which is the real shame of this proposal.
Paddo
Andrew, it is not naive. Your argument is flawed and illogical. If supposed research suggests that commissions are welcomed, why has it delivered such chronic underinsurance? None of you have delivered a satisfactory argument to this.
It is the same as the pro-asset based fee advisers who fail to answer the question regarding inherent conflicts of interest in such models. How does an asset based fee pay an adviser to recommend paying off a mortgage or investing in a product for which they can not charge asset based fees?
You pro-commission apologists always fail to answer the relevant questions and just simply want to protect your conflicted models.
Here’s one for you: every client I have spoken to prefers an unconflicted, FFS model.
The nation’s financial services dispute resolution service has made clear that justifying the establishment of an SMSF requires more than just vague indications from clients that they want more control of their super.
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