Ban on some payments
The Government has released Tranche 2 of the FoFA reforms and committed to a ban on “conflicted remuneration” structures under proposed section 963 of the Corporations Act. “Conflicted remuneration” is defined as any benefit (monetary or otherwise) given to a financial planner for the provision of advice to retail clients where the benefit (a) might influence the choice of financial product recommended or (b) might otherwise influence the financial product advice given.
The following are explicitly conflicted remuneration:
- a benefit access to which, or the value of which, is dependent on the total value of financial products of a particular kind, or particular kinds, recommended by the licensee/representative of licensee
- a benefit access to which, or the value of which, is dependent on the number of financial products of a particular kind, or particular kinds recommended by the licensee/representative of the licensee
- a benefit access to which, or the value of which, is dependent on the total value of investments of a particular kind, or particular kinds, made by retail clients, or a class of retail clients, to whom the licensee or representative provides financial advice.
Exclusions
Certain things are specifically excluded from being conflicted remuneration, such as:
- a benefit from a general insurer or life insurance company for the provision of an insurance product
- where each of the following exists:
- the benefit is given to the financial planner in relation to the sale of a financial product to another person, and
- the financial product advice in relation to the product/class of products, has not been given to the person as a retail client
- the benefit is provided by the retail client
- the benefit is prescribed as not being conflicted advice.
Non-monetary benefits
Non-monetary benefits are not conflicted remuneration in the following situations:
- the benefit is provided by a general insurer in relation to a general insurance product
- the benefit is within prescribed limits
- the benefit is a genuine education or training benefit that is relevant to the adviser and complies with any regulations attached to the provision of such benefits
- the benefit is an IT/software benefit, is related to the provision of financial advice to retail clients and complies with any regulations made for the purpose
- the benefit is prescribed as not being conflicted remuneration.
Benefits provided to employees
Certain benefits provided by an employer to an employee are not conflicted remuneration, such as:
- the benefit is remuneration for work done or to be done as an employee and isn’t a volume based remuneration
- the benefit is remuneration for work done or to be done by the licensee or representative as an employee of an employer and that employer is an Authorised Deposit-taking Institute (ADI), access to the benefit is dependent on the adviser recommending a basic banking product and the adviser does not give other forms of financial advice about financial products other than basic banking products.
The proposed changes say a licensee must not accept conflicted remuneration and the licensee must take reasonable steps to ensure representatives do not receive conflicted remuneration. Authorised representatives must also not accept conflicted remuneration. Employers must also not pay employees conflicted remuneration.
Shelf-space fees
Platform providers can still pay a fee to a licensee to operate their platform. However, a licensee cannot accept such where it is volume-based shelf-space.
Asset-based fees on geared investments
A financial planner must not charge asset-based fees on geared funds used or to be used to acquire financial products. Regulations may provide for some circumstances where asset-based fees on gearing may be permissible.
An asset-based fee is defined as a fee that is dependent upon the amount of funds used or to be used to acquire financial products by or on behalf of a retail client.
The IPA believes these are positive reforms. While most advisers have done the right thing by clients, others have not and commissions in particular create a conflict. Because the commission is paid by the product provider, there is the potential for a conflict to emerge. Removal of this conflict will help, we believe, to establish the client at the forefront of the relationship.
While there are some who still oppose the banning of commissions the reality is that most in the financial advice sector have been preparing for the ban by moving to other remuneration models.
Not being banned
The Government at this stage is not banning commissions on most forms of risk/insurance advice or in relation to mortgage broking. The IPA believes that banning of commissions in relation to risk advice will come in the future. The concerns in relation to conflict still exist in relation to risk products, particularly given the heavy weighting of commissions in relation to initial sales. However, it is accepted that the insurance industry is not as prepared as the remainder of the financial advice sector.
