Urgent Grandfathering Solution Needed

2

The financial advice sector is urging the Government and Opposition to ‘remove the shackles’ imposed by the disallowance of the Future of Financial Advice amendments by reinstating grandfathering regulations.

AFA CEO, Brad Fox
AFA CEO, Brad Fox

Among the FoFA amendments that were disallowed by the Senate last week were fixes to the grandfathering arrangements which enabled advisers to move freely between licensees without fear of losing trailing commissions and benefits. The disallowance (see: Senate Takes Axe to FoFA Amendments) means that the FoFA legislation and associated regulations revert back to the original Labor Party-penned wording.

In the case of grandfathering, this means advisers are subject to the regulations put in place by the then Labor Government on 28 June 2013. The grandfathering regulations permit the continued payment of conflicted remuneration between product providers and licensees if the arrangement was entered into prior to 1 July 2013. However, there is significant ambiguity around whether the conflicted payments can be passed on to representatives of those licensees, and if the payment should cease if the adviser moves licensees. Because of the timing of the Federal Election, the then Labor Government did not have sufficient time to address these ambiguities before it lost power to the Coalition. It took the new Coalition Government over nine months to resolve the grandfathering issue.

Now, as a result of the overturning of the Coalition Government’s amendments to grandfathering, Association of Financial Advisers (AFA) CEO, Brad Fox, said the industry once again found itself locked in to existing license structures.

…smaller licensee businesses will shrink or disappear and consumers will have less choice about where they seek advice

“What it meant then, and what it will mean again unless the issue is addressed, is that licensees will not be able to recruit advisers from other licensees. Smaller licensees will not be able to grow their adviser bases and larger licensees will have their advisers locked in. New licensees will not be able to be launched. The small will get smaller and the big, bigger and that’s not a competitive market place.

“Large institutions will be likely to gain even greater control over advice, smaller licensee businesses will shrink or disappear and consumers will have less choice about where they seek advice.”

He added that there are many advisers who are currently in the process of changing licensee who have been caught by this sudden disallowance. Riskinfo has already been contacted by advisers who are mid-sale, querying what effect the disallowance will have on the value of their business.

“In this environment, they will be confused, stressed and uncertain about whether they should proceed with the move or be forced to stay where they are,” Mr Fox said.

Financial Planning Association (FPA) CEO, Mark Rantall, said it was inappropriate to put in laws that punish those who operated according to the law at that time.

“You can’t just wipe away people’s lives and livelihoods with the stroke of a pen for the sake of a crusade for ‘what is right’. It is not right and it is not appropriate. We’re very supportive of changing things to protect consumers for the future. We’re absolutely supportive of what’s at the heart of the FoFA reforms. We’re absolutely supportive of banning commissions, which we did in 2009. But we’re not supportive of taking away, retrospectively, people’s right to generate income.”

Synchron Director, Don Trapnell
Synchron Director, Don Trapnell

Also voicing a concern about the impact on advice businesses was Synchron Director, Don Trapnell, who said advisers were now ‘shackled’ to their existing licensees.

“We now have, embodied in legislation, the Hotel California clause, whereby advisers can check out of a licensee arrangement anytime they like, but can never leave without suffering a significant financial penalty – a penalty too severe for most of them to survive.”

He said it was ‘inconceivable’ that the Labor Party intended to legitimise restraint of trade when it first drafted the reforms, and called on the Opposition and independent Senators to immediately reinstate the grandfathering amendments.

“A whole sector of Australian small business will be restricted in their ability to choose a means of distribution that is in line with their culture and their business model,” he said.

…clients will obviously be worse rather than better off

Mr Trapnell also highlighted the impact the disallowance is likely to have on consumers:

“Many advisers are currently looking to change licensees in the interests of their clients as they look towards new business models and a better cultural fit. Following the disallowance, advisers will not be able to move to another licensee even if it would enable them to better service their clients, without suffering significant financial penalty. Even If advisers bite the bullet and change licensees anyway, they will then be forced to charge their clients an ongoing fee for service. This will be in addition to the expenses levied against the clients’ accounts by the fund manager. If that happens, clients will obviously be worse rather than better off.”

Claire Wivell Plater, Managing Director, The Fold Legal
Claire Wivell Plater, Managing Director, The Fold Legal

Claire Wivell Plater, Managing Director of financial services specialist law firm, The Fold, said there were two possible solutions to the current issue.

“The simplest solution is to allow the grandfathering amendments to stay,” she said. “This is a win/win/win situation – it’s a win for advisers because they will not lose a revenue stream they earned under the prevailing rules of the day. It’s ultimately a win for licensees because it will allow each to compete on its own merits in the battle to attract advisers. It’s also a win for industry sustainability because it avoids wiping significant value off adviser businesses with the stroke of a parliamentary pen.”

The alternative albeit less attractive solution, said Ms Wivell Plater, is to appeal to licensees to pay trails to the adviser who earned them, regardless of which licensee licenses the adviser has possibilities.

It’s hard to see how curtailing commercial activity in small business in this way can be in anyone’s interests

“It would make the licensee a good corporate citizen, but that doesn’t necessarily mean it makes good commercial sense for them and there are significant risks for the adviser if the licensee strikes financial difficulties.”

Mr Fox called on the Government and Opposition to take the necessary steps to resolve the issue as a matter of urgency, arguing that the prevention of grandfathering for advisers changing licensees does not help the client in any way.

“The cancellation of the payment of an inbuilt adviser remuneration to an adviser, does not result in the payment being rebated to the client, nor does it in any way reduce the client’s costs. The amount will be retained by the product provider or the licensee,” he said.

Ms Wivell Plater agreed that the situation needs to be resolved quickly. “It’s hard to see how curtailing commercial activity in small business in this way can be in anyone’s interests,” she said.



2 COMMENTS

  1. Disallowing the continuation of Grandfathering when the client’s managing adviser changes licensee is illogical. It is akin to a Real estate Agent losing the right to receive Rent Roll Commissions when the sell or change Estate Agents. Surely its restricted trade practice?

    Cool heads and hard negotiating is needed from here by our industry bodies otherwise Small Business Advisers and their clients, who are mostly average Australians, are the ones who will lose out.

    We also need to use language that is representative of the facts and our history and not what the ISA and its Union fund buddies (Bill Shorten) have infiltrated into the conversation. Commission payment from product insurers are NOT a Conflicted Remuneration they are a Traditional Remuneration.

  2. Get our industry out of politics- these people clearly have no idea and are causing massive damage.
    It’s our clients, especially the smaller ones that are being kicked around and harmed.

Comments are closed.