Commissioner Kenneth Hayne’s recommendation to end grandfathered commissions and fee-for-no-service practices in advice could result in up to $3.7 billion in one-time remediation payments and an additional $1.1 billion a year flowing into member accounts, a report published yesterday by research house DEXX&R states.
The report, which compared the funds under management in products at June 2018 with those in force at June 2013 for products held by BT/Westpac, ANZ/OnePath, CBA/CFS, IOOF and NAB/MLC, comes in response to Hayne’s final report denouncement of the conflicted commissions that were allowed to remain in carve-outs from the 2013 Future of Financial Advice reforms.
“Grandfathered provisions for conflicted remuneration should be repealed as soon as reasonably practicable,” Hayne stated. “Even if the arguments relied on to justify the grandfathering exception were valid when that exception was introduced, it is now clear that they have outlived their validity.”
And on the practice of licensees charging clients for advice without providing a bona-fide service, Hayne was blunt and unequivocal.
“Charging for what you do not do is wrong,” he stated, before suggesting prosecution of licensees under Section 1311 of the Corporations Act be considered, along with a raft of changes to service agreements, to eradicate the problem.
Hayne estimated “at least $850 million” in compensation would be paid for fees-for-no-service transgressions, which he noted could happen in a variety of ways.
“The client may have terminated the relationship with the adviser; the adviser may have left the advice licensee; the client may no longer have been an eligible member of the relevant superannuation fund to seek advice from the nominated adviser; the client may have died,” Hayne wrote.
DEXX&R managing director Mark Kachor says the bottom end of the range will eventually be much higher than Hayne’s estimate. He says that if 15 per cent of (pre-FoFA) personal super and 40 per cent of (pre-FoFA) employer super were subject to the deduction of fees-for-no-service, remediation would involve a one-time payment of $1.75 billion to member accounts. Further, if 25 per cent of grandfathered commissions were switched off, an extra $730 million would flow into member accounts each year.
The “high estimate” – which involves 50 per cent of personal super and 40 per cent of employer super being subject to deduction of fees-for-no-service – would return $3.7 billion upfront and $1.1 billion a year, the DEXX&R report states.
Licensees, Kachor explains, will be the ones losing revenue from the fee-for-no-service cleanout.
“Fees-for-no-service is actually, by definition, a fee being charged to a client that is not being charged by an adviser, so fee-for-no-service remediation will have no effect on current advisers because these are all clients that have been unlinked from the adviser,” he explains.
If anything, Kachor says, advisers should end up with more FUM to invest on behalf of their clients.
“For all those who fall into this category, this is the amount each year that there is going to be available to invest, which was previously deducted as charges,” he notes.