The Association of Financial Advisers has doubled down on its support for grandfathered commissions. The AFA’s general manager of policy and professionalism, Phil Anderson, says critics such as the regulator and consumer advocate group CHOICE are getting their facts wrong.
Anderson, speaking at the AFA National Roadshow in Sydney, said many of the arguments for discontinuing grandfathered commissions were based on a misunderstanding of AMP head of advice Jack Regan’s comments at the Hayne royal commission, when he referred to the importance of commissions in advice as “60 to 70 per cent”.
“Obviously, he was talking about the broader commissions,” Anderson said. “It included life insurance commissions, it probably included mortgage broking commissions and other forms of income they may receive.”
Anderson said the misunderstanding snowballed from there.
“The problem was that statement got used by ASIC to suggest that we haven’t seen the expected decline in grandfathered commissions as directed by FoFA, and CHOICE came out and suggested that it highlighted the fundamental problem that was there.”
Anderson quoted data from research house Investment Trends, which purported that grandfathered commissions, as a percentage of practice revenue, had declined from 30 per cent in 2010 to 9 per cent in 2018.
“It makes up only a small portion of total practice income,” he concluded. “The whole issue has been the subject of an over-reaction.”
Anderson also took aim at criticism from the Australian Securities and Investments Commission, which stated in its submission to the Hayne inquiry that: “Grandfathered commissions operate to incentivise advisers to keep clients in legacy products with a continuing commission structure, even where there may be better products available to meet the client’s needs.”
There are a range of obstacles that prevent clients from moving to newer, more competitive products, Anderson said, including exit fees, capital gains tax, and deeming treatment for income stream products.
“The government needs to deal with these obstacles before they move forward with removing grandfathered commissions,” he asserted.
Against the grain
Commissions were originally banned in 2013 Future of Financial Advice reforms, in an effort to limit conflicted remuneration, but lobbying from banks and wealth businesses led to concessions for “grandfathered” or existing commissions.
The move to end grandfathered commissions has gained momentum since the second round of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in April this year. In the aftermath, Westpac announced that it would stop paying commissions to its BT Financial Group advisers and Macquarie – the nation’s largest investment bank – committed to axeing the commissions by April 1, 2019.
Yet the battle of the ban still rages, and the AFA remains fervent in its advocacy for retaining grandfathered commissions, despite being buffeted by what Anderson called “a level of momentum” for change.
Anderson made the point – “one that was played out very clearly through the whole FoFA debate”, he said – that the government could not simply take property, in the form of grandfathered commissions, away without just compensation.
He also posed a question to the assembled AFA members: if you turn off trail commissions, who gets the benefit?
“The product providers get to keep the money,” he answered. “Well, that’s a real win for clients”.
If you switch off commissions, Anderson argued, clients don’t get the money and they don’t get the advice either.
“That’s a complete failure,” he said.
Case by case
Within hours of Anderson’s presentation, Treasury published a background paper (dated July 13) describing its position on key policy issues, including “the continuation of the statutory carve-outs to the ban on conflicted remuneration”.
The submission detailed how, at the time FoFA was introduced, it was believed grandfathered commissions would have “a short natural life”, but that they have “persisted for longer than expected”.
While admitting that estimating the value of remaining commission trails remains difficult, Treasury estimates that the value is about $214 million a year.
Treasury suggested that grandfathered commissions should be discontinued – but individually, not as a whole.
“Given the varied nature of the exemptions,” the background paper read, “removal of these exemptions is best considered on a case-by-case basis following a thorough analysis of the impacts and trade-offs involved.”
Advisers, it stated, could make up any lost revenue by raising prices.
“Advisers may seek to recover any lost revenue by imposing additional advice fees directly on their customers,” it read. “They may also stop servicing certain customers or exit the industry if no longer financially worthwhile to remain.”