The end of so-called grandfathered commissions seems inevitable following Commissioner Kenneth Hayne’s interim report, in which he laments the carve-outs from the 2012 Future of Financial Advice (FoFA) reforms.
“…[T]he question must be ‘Why should the grandfathering provisions remain?’ The question is not, as AMP, NAB and ANZ suggested, ‘What evidence is there to warrant change?’ ” Hayne stated in his highly anticipated interim report. The report didn’t make recommendations; rather, it sought to ask how the bad behaviour in financial services happened, and what could be done to prevent it from happening again.
The term “grandfathered commissions” came about after the commencement of the FoFA reforms, when payment and receipt of some forms of conflicted remuneration for financial advice was permitted to continue thanks to a carve-out from the legislation.
FoFA had three principal elements: the imposition of a best-interests obligation on financial advisers giving personal advice to clients; a ban on conflicted remuneration; and measures intended to promote greater transparency by requiring consumer agreement to ongoing advice fees, along with enhanced disclosure of fees and the services associated with ongoing fees.
“We fought very hard to keep the FoFA legislation intact; we left plenty of room for the industry to self-regulate and they didn’t step up,” Bernie Ripoll told Professional Planner on Friday. Ripoll was a Labor MP with oversight of ASIC, along with other agencies within the Treasury portfolio. He now heads consulting business SAS Group and holds various board positions, including a seat on the Allianz Retire+ board.
He said he believed the industry’s inaction after FoFA has made regulators and policymakers more intent on making a crackdown stick this time around.
“Institutions put a lot of effort into saying this FoFA was a step along way and that the government would be making a mistake if it was to go too hard…There was a lot of good will from the government at that time; the industry was given the opportunity to self-regulate and it’s evident now the industry won’t move on its ow – it has to be forced,” Ripoll said.
Hayne is fully aware of the lobbying that went on in the background during the final stages of FoFA. In his interim report, he highlights that before the introduction of FoFA in 2012, The government established a Peak Consultation Group drawn from bodies as diverse as the Association of Financial Advisers, the Australian Banking Association, CHOICE, Industry Super Australia and the Property Council of Australia.
“For about 12 months before the legislation was enacted, this group met each month to discuss the proposals,” Hayne noted. “It is, therefore, not surprising that the resulting provisions show signs of compromise and accommodation of widely divergent interests.”
Since April, when financial advice was in the spotlight at the hearings, Westpac, Macquarie, NAB and ANZ have all announced that they will cease paying grandfathered commissions to the advisers they employ, Hayne noted.
In contrast, AMP submitted that the grandfathering arrangements provided for under FoFA should remain in place and be allowed to wither on the vine.
“Evidently, some entities have overcome the arguments against removing grandfathered commissions, and now consider it advantageous to do so. The first-mover problem has been eliminated. The onus now shifts to the entities wishing to continue to pay and accept grandfathered commissions to demonstrate why the calculations made by [those who have banned grandfathered commissions] do not work for them.”
Hayne also dismissed ANZ’s suggestion in its submission that banning grandfathered commissions may constitute an acquisition of property “on other than just terms”.
“Two points may be made about those allusions,” he wrote. “First, where would be the ‘acquisition’? Who would acquire anything? It is not apparent that any proprietary benefit or interest would accrue to any person. But second, and no less importantly, if the point is good, it was good when most forms of conflicted remuneration were prohibited. Yet no one sought then to challenge the validity of the relevant provisions and the FoFA bans on conflicted remuneration have now been operating for five years without challenge.”
Regulators need to move quickly to implement the recommendations when they come through in February, Ripoll said. He predicted politicians would “move forward hard” to take action.
“I see a bit of a bidding war for who is going to be the toughest cop on the beat leading up to a federal election,” he said. “The current government don’t quite own it because they didn’t want it. If they want some ownership they have to move hard.”
