Volume bonus payments for life risk product advice look set to continue, based on the latest draft guidance issued by the Australian Securities and Investments Commission (ASIC).
The regulator has issued a further Future of Financial Advice (FoFA) consultation paper, CP 189, which focuses on conflicted remuneration. ASIC says the paper is designed to the help industry understand the practical operation of the conflicted remuneration provisions and how ASIC will administer them. In the document, ASIC sets out a list of benefits which are not considered conflicted remuneration, and are therefore permitted to continue after 1 July 2013. In relation to life risk, the paper states:
‘A monetary benefit is not conflicted remuneration if it is given for advice on a life risk insurance product only. A life risk insurance product is generally a life policy or a sinking fund policy that is a contract of insurance.’
The consultation paper goes on to highlight that the exclusion only applies to retail life risk products, and that monetary benefits for group life insurance policies for superannuation members and individual insurance for default super members will be treated as conflicted remuneration.
According to Dante De Gori, General Manager – Policy and Government Relations at the Financial Planning Association, the retail risk exclusion will apply to volume payments made by life risk product providers, meaning these payments can continue. However, he warned that the practical application of this regulation could be problematic.
… there will be a need for strong transparency because the onus of proof will fall to the dealer group to show the payment is not conflicted
“Currently I would think that most providers bundle all their products together in terms of providing a payment, that is both group and retail risk,” Mr De Gori told riskinfo.
“Under the new regime they will need to be itemised, because only payments relating to retail life risk products will be permitted. This could make structuring those benefits quite difficult, and there will be a need for strong transparency because the onus of proof will fall to the dealer group to show the payment is not conflicted.”
Mr De Gori said that the draft guidance raised bigger questions about how life risk products fit into the broader FoFA environment.
“The partial ban on risk commissions for products inside super is confusing, but then you add to that non-monetary benefits, which look to be banned for life risk. It creates a certain amount of uncertainty as to how the regulations will work in practice. And it raises questions about other areas such as bonuses for salaried advisers who work in the life risk space,” he said.
Adding to this uncertainty, says Phil Anderson, Chief Operating Officer at the Association of Financial Advisers, is the lack of Treasury regulations in relation to the grandfathering of platform operator payments and volume bonuses.
There’s still a long way to go in this process
“It makes this a bit of a circular exercise,” Mr Anderson said. “You have to remember that this is just a consultation paper, and a lot of questions will come out of the review. Then you’ve got to add in the Treasury regulations, which are quite critical. There’s still a long way to go in this process.”
Despite this ambiguity, both men praised ASIC for providing clarity around how it would approach conflicted remuneration and the areas on which it would focus its attention. We have summarised some of the main regulations below, including clarification around the key issue of grandfathering…
Grandfathering
The guidance paper provides some information relating to the grandfathering of commissions for existing advice clients.
According to the paper, any arrangements entered into prior to the ‘application day’ will not be subject to the conflicted remuneration regulations (see Start Date below).
After the application day, if the existing client is transferred to a new product, which replaces their existing interests, then they will become subject to the new regulations.
However, if an existing client is transferred to another licensee or representative after the application day, the existing remuneration arrangement will be able to continue, depending on the form of the arrangement and how the transfer is made. This implies that advisers will be able to sell their existing book of business to a new advice provider without losing significant value, as trail commissions on that book will be allowed to continue.
Benefits provided by dealer groups to authorised representatives
ASIC has flagged a number of other arrangements frequently offered by licensees to advisers that may fall under the term ‘conflicted remuneration’. These include:
- Shares or other interests in a dealer group
- Loans to representatives
- Buyer-of-last-resort arrangements
- Marketing assistance
According to ASIC, whether advisers in receipt of these kinds of benefits will be subject to regulatory action will depend on the substance of the benefit, and the circumstances in which it is given:
‘The conflicted remuneration provisions are concerned with benefits that could influence the provision of financial product advice in a way that is not aligned with the interests of the client. Whether this is the case will depend on the substance of a benefit, rather than its form, what the benefit is called or how it has been presented to the client.’
Dealer group payments
Under the section of the consultation paper relating to volume based benefits, ASIC says that it is less likely to scrutinise a benefit made to a dealer group that is either:
- Fully rebated to the client
- Not passed on to the adviser
ASIC provides the example of a commission payment from a platform operator to a dealer group to illustrate this point, indicating that such a payment would be permissible if no portion of the benefit is passed on to a person that provides financial product advice to a retail client, and the group can demonstrate it has a wide approved product list established through robust product selection policies.
However, both Mr Anderson and Mr De Gori warned against viewing this exception as a “loophole”, because of the level of controls a licensee would need to have in place in order to prove the payment was not conflicted.
Small value benefits
Regular lunches hosted by business development managers may be a thing of the past, even if the total cost per head is under the $300 soft dollar limit. This is because small benefits provided on a regular basis will be subject to scrutiny, with ASIC clarifying that ‘regular basis’ means at least three times a year. ASIC gives the example of an employee of a product issuer taking five advice licensee representatives to lunch, where the value of the lunch is less than $150 per head. According to the regulator, if the employee took the same five representatives out on a regular basis… ‘we are more likely to consider this to be conflicted remuneration’.
Start date
The conflicted remuneration provisions will apply from 1 July 2013, unless the licensee has lodged a notice with ASIC electing to comply with the new legislation ahead of this deadline. This date is referred to as the ‘application day’.
However, conflicted remuneration provisions that apply to group life policies for members of a superannuation entity or a life policy for a member of a default super fund do not take effect until 1 July 2013, and therefore licensees cannot elect to comply to these regulations early.
Click here to access ASIC’s Consultation Paper (CP 189) on conflicted remuneration.
The due date for submissions on the draft regulations is 9 November 2012.
Our industry is over regulated, no question about it.
Conflicting remuneration is, in my book, a FoFA-driven arrangement which is like making a Mt Everest out of a speed bump.
Let me illustrate: a person teaches guitar to his students for which they pay him a fee. Some students have old guitars or very poor ones, but as the teacher also sells quality guitars to facilitate the students’ learning and to supplement his income, they buy them from him.
In our industry’s new FoFA culture that’s tantamount to conflicted remuneration! It’s ridiculous, but that’s the direction advisers are being herded into!
I agree that our profession is over regulated.
Your example of the guitar teacher is not correct as he can buy the guitar from the distributor and resell it to his students without issue.
What ASIC is saying if the guitar distributor took the teacher to lunch more than 3 times a year his profit would be conflicted remuneration.
Get rid of the lunches and there is no issue..
I thought it was a fitting and good illustration, William!
That said, there’s considerably more to it that taking clients out to lunch times 3+ for it to be conflicted remuneration. My point overall is that our ability to “trade” and to as it were make every post a winner – entrepreneurial – is being severely curtailed by these draconian proposals.
I am encouraged by the grandfathing explanation but it does not help the loss caused by the transition to MY SUPER, JUST POSTPONES IT.
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