The controversial Accounting Professional and Ethical Standards Board (APESB) financial planning standard will go ahead largely unchanged, but with new and generous transitional arrangements, which mean that some of the key standards will not come into full effect until 2018.

The APESB met on Friday to confirm that the Accounting Professional and Ethical Standard 230 Financial Planning Services (APES 230) will proceed unchanged in substance, and come into effect on July 1, 2013, but with new arrangements to ease the introduction.

The standard is largely consistent with the provisions of the Future of Financial Advice (FoFA) reforms that come into effect on July 1 next year, with the notable difference that asset-based fees will be banned under APES 230. In addition, members of the key accounting bodies – the Institute of Chartered Accountants (ICA), CPA Australia (CPAA) and the Institute of Public Accountants (IPA) – that offer financial planning services will not be permitted to receive commissions on life insurance business, nor to charge asset-based fees.

On board with FoFA

The draft standard met considerable resistance, but the APESB has not significantly altered the substance of the standard.

However, it has recognised that the standard will force substantial changes on some accountants’ business models and it has granted additional time for those changes to be made.

The standard may also have an effect on referral relationships between accounting firms and financial planning firms. There remains some uncertainty as to whether it is permissible for an accounting firm to refer clients to a financial planning firm that operates at a standard “lower” than APES 230.

APESB standards are binding on members of the ICA, CPAA and the IPA.

The APESB says that if a member provides financial planning services which include the sale of life insurance or “other risk contracts and the procurement of loans” before July 1,2013, then they can only continue to receive commissions if they provide additional services.

If between July 1, 2013, and July 1, 2015, a member provides financial planning services that include the sale of life insurance or “other risk contracts and the procurement of loans”, then they can only receive commission for those sales up until July 1, 2018, and only if “the member receives specific disclosures and informed consent from clients”.

“The board clarified that the proposed standard allows members to accept trailing commissions for financial planning services which are entered into prior to July 1, 2013, in respect of life insurance, other risk contracts and the procurement of loans as long as the member does not subsequently provide further services in respect of those contracts or loans,” it said.

“The board further determined to prohibit third-party payments from July 1, 2013. The provision of professional development for members from third parties will be excluded from this prohibition provided such professional development meets the requirements of the FoFA legislation.”

APES don’t always understand

The ICA and CPAA released a joint statement that said there were still “a number of important issues that we believe the APES Board has failed to fully consider in resolving to issue this important standard”.

“Members of the Institute and CPA Australia promote and uphold the public interest in all aspects of their role as trusted professional advisers to millions of households and businesses right across Australia,” it said.

“The two bodies are reviewing and analysing the latest proposals from the APES Board and will consider all options in regard to how we may respond.

Once this analysis has been completed, the Institute and CPA Australia will then be able to advise members of their joint response and position in relation to APES 230.

A win for the public interest

Robert MC Brown, a chartered accountant, Professional Planner contributor and staunch supporter of the accounting standard, says the aim of APES 230 is to establish “a self-regulated professional and ethical structure above the minimum level of the law”.

“That’s the hallmark of any true profession,” Brown says.

“My hope is that over time this important decision by the APESB will lead to all financial planners, not just accountants, adopting similar professional and ethical principles.

“I have no doubt that making the change will be challenging for some, but it must be remembered that many financial planners already operate in accordance with these principles, and that doing so has improved the profitability of those practices, while creating unqualified trust between planners and their clients through the removal of conflicted remuneration.

“That’s a win for the public interest, for clients and for financial planners.”

Simon Hoyle is head of market insight for CoreData Research.
9 comments on “APES crack down on referrals, commissions”
  1. Avatar Peter Johnston - AIOFP

    They should read Justice Jim Spigelman’s paper THE TYRANNY OF THE BILLABLE HOUR where these ‘noble’ professions are accussed of going slow and other deceptive practices that make a mockery of hourly rate charging. The front page of the AFR over the years has also made interesting reading with graduates encouraged to ‘meet budgets’ or lose their jobs……creative accounting they call it.Lets dispense with delusions and get in the real world.

  2. Yes this ridiculous debate drones on. When will Professionl Planner seek article contribution from someone who actually resides on planet earth? I can see the front page headlines now “Financial Planners from all over Australia line up to join APES 230 rules”. Seriously MC Brown what planet are you actually on. It is very easy for you to sit in the grandstand of the Industry and posture your view of best practice from afar. Regardless of its absurdity.Of course while you were in practice you never received asset based fees or life insurance commissions did you?

    This whole debate is predicated on the basis that i as an ICAA member and PA holder do not act in the best interests of my client. Alternativly i cannot be trusted to do so. This is despite me doing this for as long as i can remember.

    Its a joke and the ICAA and CPA should be ashamed of their performance in this regard. Yes they will both loose members over this absurdity. History will be the judge i can only contend that the exodus will begin with me……..

    1. Mark, I don’t understand why people make these higher standards sound so difficult. We have been implementing the bones of APES230 since before the GFC. It can be done in the real world if you just think a little deeper.

      1. Pat, You miss the point entirely, Its not the standards that concern me. As a practicing CA and Adviser I abide and operate by very high standards, always have. How i charge my clients is a business decision for my business with client agreement. Not a job for governing bodies to determine. The basis of this is that i cannot be trusted to act in my clients best interests i need big brother to enforce this on me. Why should i have to think a little deeper about something i already practice? I conceed there will be some who are happy to be told how to run their business, accept that they cant be trusted to act in their clients best interest and accede to the academic idealists that have drafted this nonsense. One wonders what is next on the list?

  3. Why is any financial planning debate focused purely on adviser and remuneration? The current structure of charging clients insurance fees compared to commissions simply doesn’t make sense.
    1st – It’s not tax deductible like commissions are, surely an accounting body could work that part out and that it is not in the clients best interest to lose the tax deduction?
    2nd – A 100% upfront commission is lost with only a 20% reduction in the premium to the client. The insurance companies need to be included in this process and come up with a better premium discount structure for Nil commissions, because i cant see the benefit of the client still paying 80% of the premium plus paying me a fee and thus having to pay well over 100% of the premium price in year 1 ? Ongoing it is not much better either ? So what have APES looked at in relation to the insurance companies ??

    APES need to have some common sense and widen the debate ??

    and of course accountants would never pad out working hours or up charge clients for work that hasn’t taken as much time as they say ?? No never they are holier than holy.

    1. Adam,

      I don’t understand your points:

      1. Since when are the premiums on life, TPD and critical illness tax deductible? Therefore, how can the commissions on such policies be deductible? If held via a super fund, sure, they may be deductible to the fund, but so will the fees.
      2. If I establish a policy of insurance ordinarily costing $3,000 p.a. rebating the commission, the client saves 30% (with the insurers we use). That is an annual saving of $900 every year for the life of the policy. Even if we charged $2,000 for the upfront work to do so, the client breaks even just after 2 years and is ahead thereafter.

      Given most advisers sell stepped premiums, the annual savings will increase significantly.

      And, finally, if you wish to throw pathetic arguments about padding fees, one could simply retort with “Storm”. They charged asset based fees and look at that outcome.

      Despite all that, APES230 doesn’t even apply to me, but it is a higher standard that financial planners should aspire to.

      1. Pat,
        1) Ever heard of keyperson insurance ? these premiums are deductible if used for revenue purposes. And of course you don’t mention income protection, always deductible.
        You might also like to look at the tax laws on initial financial planning fees as they are not tax deductible? upfront Commission are ? Yep silly isn’t it.

        2) So the client pays $4,100 in year 1. (note many companies dont give 30% discount so it would actually be more), thus the client gets a 37% increased fee from your example and also $2K fee that is non deductible, say at 30% = another $600 tax cost. So now they are $1,700 out of pocket. And I guess because you think no ongoing work is ever done by financial adviser you will not charge any ongoing fees ? So on a 20% discount thats now 3 years plus ongoing fees, so more like 4 or 5 years? Not many clients see that benefit that far down the track ??

        1. Adam, you are labouring a point, mate. Of course I didn’t include income protection because one would hope that everyone reading this would know that income protection premiums are deductible. Keyperson insurance – yep, all of my clients have it. Major part of my business. Cornerstone of all life business in the industry, right? But, tell me this, how is the client going to claim a deduction for the effective commission paid on the life, critical illness and TPD? Oh, right, they can’t. Understood.

          On point 2, explain to me why you have assumed all of the premium is tax deductible? Oh, you can’t. Ok. Can you explain to me why you are comparing pre-tax costs and then adding an incorrectly assumed ‘tax benefit’ to a pre-tax figure. Your argument makes no sense. So, if I was to use your ludicrous assumptions that the entire premium is tax deductible, simple mathematics suggests the client is down, on a cumulative basis, $700 after the first anniversary (2 premium payments), breaks even after 2 years (3 premiums) and then is ahead by about $700 afer 4 years.

          In reality, we charge our clients a tax-deductible, ongoing retainer fee for ongoing service that includes an overall review of their position, including insurance.

          If we can negotiate 30% discounts, I don’t see why you can’t. Best interests of the clients and all?

          I certainly hope you don’t manipulate numbers like that for your clients. You have thrown in a 20% discount when I stated we get 30%.

    2. Avatar Jamie Forster

      Pat

      It sounds as though you have a remuneration model that fits your business and service offering.

      Whilst, in general, I think that fee for service is flawed in respect of risk advice, I wouldn’t presume to comment on the appropriateness of yours or anyone else’s business model including the way that they charge without being asked and without knowing the facts.

      As long as you feel that you are being appropriately compensated for your expertise, time and the professional liability risk you accept when providing advice and you are putting the client’s interest first it is of no consequence to anyone else.

      In my opinion, many of those that charge fee only for risk advice are not being adequately compensated for the professional risk that comes with providing advice assuming the adviser accepts responsibility for that advice. However, that is their business, not mine.

      I run a specialist, risk only business and charge commissions. Somehow, despite the fact that I have 20 years in financial services, multiple degrees, specialist accreditations in SMSF from SPAA and risk from the FPA and specialise in risk advice I am, in the eyes of some, less professional than someone with twelve months experience, with PS146 only and who provides advice across a broad spectrum of financial planning simply because that person charges fee for service.

      It is ludicrous that the way in which an adviser is remunerated is more of a measure of their professionalism than competence, qualifications, experience and depth of knowledge. It is a tragedy for consumers that quality of advice has been disregarded by the red herring of remuneration. A red herring ironically being promoted by vested interests.

      Commissions are the most appropriate form of remuneration for my practice. I am no more conflicted than any of my colleagues who charge using a different model. That is, there is necessarily a conflict between my interests and my clients. However, just like doctors, dentists, accountants and solicitors manage that conflict, so do I.

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