The government recently dismantled a final argument in defence of grandfathered conflicted remuneration when it released regulations providing that from January 1, 2021, conflicted payments can no longer be made to advisers (or licensees). These payments, where they cannot be stopped, must instead be paid to clients.
This move effectively ends what might have been a rearguard action to “save” grandfathered commissions. An argument consistently put forward in defence of ongoing conflicted remuneration is that cutting advisers off from the payments won’t leave clients better off, because product manufacturers would be unable to stop making deductions from clients’ accounts and would keep the payments for themselves. It was as if they’d built a killer robot and forgotten to include an “off” switch and it was now running out of control.
In a statement, Treasurer Josh Frydenberg said the government has already released exposure draft legislation banning grandfathered conflicted remuneration from January 1, 2021, and the new regulations “are designed to ensure that it is consumers, not industry, that benefit from the ban”. It’s an elegant and effective solution to the problem.
Consumers’ views on adviser remuneration are clear. CoreData research has found low consumer support (18.3 per cent) opposition to the idea advisers should be allowed to be paid for the number of products they sell; and strong support for the ideas that financial advisers hold only be paid for the advice they give (70.3 per cent), and that commissions should be banned (65.4 per cent).
Born of a compromise
Grandfathered conflicted remuneration came into existence in 2013 with the passage of the Future of Financial Advice (FoFA) amendments to the Corporations Act. It was the result of a compromise in the drafting of the FoFA laws that carved out remuneration for advice and remuneration arrangements entered into before FoFA came into effect.
After that near-death experience, conflicted remuneration was expected to fade away as advisers moved clients onto new advice arrangements subject to the FoFA remuneration laws. But it not only hung around, it actually became even more entrenched. Businesses were bought and sold based on the value of it continuing. People familiar with the negotiations around FoFA say that had lawmakers known then what they know now about how the industry would respond – or had not been told barefaced lies – then the pre-FoFA carveout would never have happened.
A second argument against banning already-agreed forms of remuneration, even clearly conflicted ones, is that it’s unconstitutional because it amounts to “acquisition of property otherwise than on just terms”. Commissioner Kenneth Hayne dismissed this issue, in the interim and final reports of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
“First, where would be the acquisition?” he said. “Who would acquire anything? What proprietary benefit or interest would accrue to any person?”
Second, he said, “if the point is good, it was good at the time when most forms of conflicted remuneration were prohibited” by FoFA. He added that no one thought to challenge the prohibition of conflicted remuneration then, and the ban has been in place now for five years.
The ghostly apparition of constitutional challenge
And then, as only Hayne could, he said it is time to “ignore the ghostly apparition of constitutional challenge conjured forth by those who, for their own financial advantage, oppose change that will free advice about, or recommendation of, financial products from the influence of the adviser’s personal financial advantage”.
That doesn’t mean someone won’t still seek to challenge the ban on constitutional grounds, but notwithstanding that eventuality there is now a definite end in sight for something that should have died out through natural causes already. It was really only allowed to continue so it could prop up outdated “advice” (read: distribution) business models.
Now that the end is in sight, advisers who depend on conflicted remuneration for a living have a big decision to make, and a clear timeframe to make it in. It might not be the result they wanted, but now there’s certainty about the timing.