“Reports of my death have been greatly exaggerated”
— Mark Twain
Independent has been a restricted term in financial services for some time now, unless the user can satisfy the requirements of s923A.
Under the corporations Act, a financial services provider cannot use the term ‘independent’, ‘impartial’ or ‘unbiased’, or any other term ‘of like import’ in relation to the business it conducts if it receives commissions, volume-based payments of other gifts and benefits.
This was also expanded to include ‘independently owned’, ‘non-aligned’ and ‘non-institutionally owned’.
Simply, the law is contravened if the business or person accepts or receives:
- commissions (apart from those fully rebated to the client);
- volume based payments; and
- any other benefits or gifts which may reasonably be expected to influence the or payments.
These forms of remuneration have been in the spotlight in recent years and have undergone, or anticipated, significant changes.
The Life Insurance Framework (LIF) set parameters for the staged reduction of commissions paid by insurance companies, along with clawbacks of these payments. This was not initially received and there is still considerable discontent as advisers and businesses grapple with the reduction in their overall income and the increasing cost of services.
Previously, the law did not prohibit some forms of product-based remuneration but simply recognised the fact that it has the ability to influence the advice. The Royal Commission exposed the detriment imposed on consumers by this approach.
As a consequence, the Treasury Laws Amendment Bill 2019 (Ending Grandfathered Conflicted Remuneration) was introduced in response to Recommendation 2.4 (Conflicted Remuneration) of the Hayne Final Report.
We’ve addressed this issue in some detail elsewhere but understand that from 1 January 2021, all volume based payments will cease to be paid to advisers from investment and superannuation products and these benefits will be rebated to the customer.
“Adviser Ratings estimates that the removal of grandfathered commissions will slash the average adviser income by 42 per cent. For some firms, it could be as much as 75 per cent”
— Adele Ferguson, “Tough times before the mast as AMP voyages to the new world”, AFR, 8 April, 2019
Please remember that the FASEA Code of Ethics will be in force as of 1 January 2020. Echoing Commissioner Hayne, Standard 3 states that
“You must not advise, refer or act in any other manner where you have a conflict of interest or duty”
Likewise, Standard 7 declares that
“Except where expressly permitted by the Corporations Act 2001, you may not receive any benefits, in connection with acting for a client, that derive from a third party other than your principal.”
Regardless of your personal position, the perception of endemic conflicts impairs the delivery of advice and impedes the development of an advice profession.
“The Code of Ethics must be read and applied as a whole. Therefore, Standard 3 operates in combination with the values and other standards prescribed in the Code of Ethics in order to strengthen and inspire good practice”
— FASEA Code of Ethics (Page 17)
In a recent Professional Planner article “Cracking the code: Life under Standard 3” by Robert MC Brown, an opinion on the Standard and a number of simple scenarios are provided, where potential exists for Standard 3 to be breached.
The approach highlights the everyday situations where this may be occurring for advisers and has created some robust discussions in the reply section. Having reviewed advice which includes almost all these scenarios, it seems that advisers may not be able to provide advice at all, though the devil is in the detail.
It is important to remember that there will be many elements to the advice and the way in which advice fees are charged are only a piece of the overall puzzle.
There are many advice situations where a potential conflict exists and whether the conflict has affected the advice is assessed each time. It is interesting to note that the scenarios provided within the FASEA Code of Ethics frequently refer to the client’s best interest in conjunction with the potential conflict and this is where the assessment of the advice can take several turns.
It may seem problematic but our advice assurance methodology, for example, has always taken a similar approach to view acts and advice through the lens of the client’s best interests. For some time now, we have been assessing potential conflicts from a legal perspective first and foremost, and now with the FASEA Code of Ethics here to assist advisers, we believe this obligation may be a little easier to navigate.
Industry views: A little less conversation, a little more action
Change is hard. Change is even harder when you’re still in denial.
If you haven’t changed in response to your environment, you might find that your environment has changed beyond your capacity to adapt. It’s hard now, but it may soon become hazardous for businesses and advisers still burdened by legacies and traditional assumptions.
The AFA has criticised these regulatory changes and is concerned that advised clients may be worse off and may lose access to their adviser once conflicted remuneration payments cease. In contrast, many advisers seem to accept that the simplest approach would be to schedule a meeting with these clients and establish a fee for service engagement model.
“We are deeply disappointed at the lack of analysis on the impacts of this reform and the lack of communication and guidance for impacted clients and advisers. At this stage there will be many thousands of cases where a sensible solution is simply not available”
— Philip Kewin, CEO, AFA
Given that their own conflicts were publicly exposed at the Royal Commission, it’s perhaps unsurprising that the FPA are recommending caution. In fact, the FPA have also urged a re-think and confirmed that more than 50% of FPA members derive no income from commissions on investment products. Nevertheless, it is important that the transition is done carefully.
“Removing commissions must result in a genuine reduction in product fees or the rebating of the commissions to consumers, and we haven’t seen details of how the government expects this will work”
— – Dante De Gori, CEO, FPA
A “whole new world”? (or a “brave new world”?)
“A whole new world
With new horizons to pursue
I’ll chase them anywhere
There’s time to spare”
— Lea Salonga and Brad Kane – A Whole New World (Aladdin)
We work with a large number of Licensees, businesses and advisers and just like the rest of the population, everyone is different.
We see advice businesses which are totally reliant on commissions for the insurance advice they provide, to businesses who do not accept any form of payment or benefit from anyone except their clients and everyone in between. For the majority of these, the changes will not affect them too much, but we also understand that there will be some who will feel it the most.
As always, we will be working with Licensees to assist them and their advisers to incorporate the Law and the Code into their everyday processes .
For those who have already adopted new processes and structures in preparation of the changes, congratulations for taking action and booking your place in the new advice world.
For those who haven’t, there is still time. The removal of these payments will not be enforced until 1 January 2021. However, remember that the FASEA Code of Ethics will be by 1 January 2020.
The reality is that whether you desire the changes, they are occurring. The only way to ensure that a business and its advisers continue to be able to provide the much-needed advice that Australian consumers rely upon, is to move to a sustainable model and fee structure.
The only way to ensure that financial advice moves to a profession is to remove the conflicts and incentives that only benefit the adviser, or benefit the adviser more than the client.
What can you do?
The simple answer is to accept the changes, move any affected clients to a fee for service model and carry on. The reality is that this is not feasible in all cases and there will be certain clients who will be affected by these recent changes more than others.
We suggest that you contact your Licensee and request guidance. Alternatively, you can contact us for assistance. If you need more support in any areas during the journey, please feel free to contact us.