May 14, 2018
The AFA and FPA have fallen on opposite sides of the fence in their support for the suggestion that grandfathered payments and commissions come to an end, five years after the Future of Financial Advice (FoFA) reforms allowed them to continue.
The two groups put forward their stance on the matter in submissions to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which allowed parties that appeared at recent hearings into financial advice to comment on the question of whether grandfathered commissions should cease.
The FPA, in its submission, stated commissions are built in to the fee structure of many older products and for their removal to have any effect would also require a change in the way these products were treated by product manufacturers.
The submission added that grandfathered commissions had led to situations where consumers were paying fees without receiving services and moving all ongoing fee arrangements to an opt-in basis would cause all grandfathered fee arrangements to rapidly end.
“…it is time to review the appropriateness of grandfathered commissions…”
“With FoFA having commenced five years ago it is therefore time to review the appropriateness of grandfathered commissions and identify an appropriate means of transitioning these payments either to an alternative remuneration model or out of existence,” the FPA submission noted, adding that all such arrangement on superannuation and investment advice should be phased out over a three-year transition period.
This position was supported by ASIC which stated, in its submission, that the inclusion of grandfathered commission under the FoFA reforms was not meant to continue in perpuity and that it should not extend to new clients or new situations, as it does under the current arrangements.
“ASIC is concerned that almost five years after the implementation of the FoFA reforms, grandfathered commissions continue to form a significant proportion of licensee/adviser remuneration and grandfathered commissions operate to incentivise advisers to keep clients in legacy products with a continuing commission structure, even where there may be better products available to meet the client’s needs,” the submission stated.
The AFA, however, claimed there were no grounds to cease grandfathered commissions and doing so was unlikely to directly benefit consumers in any way.
The Association’s submission pointed out that grandfathered trail commissions were not paid by a consumer but by the product provider to a licensee or adviser and consumers did not receive a rebate or reduced product fee when grandfathered commissions were turned off.
“…almost five years after the implementation of the FoFA reforms, grandfathered commissions continue to form a significant proportion of licensee/adviser remuneration…”
“This would mean that the client gets no benefit through a product fee reduction and would also lose access to the financial adviser unless they agreed to establishing an ongoing fee arrangement, that would involve a material additional cost,” the AFA submission stated.
The AFA also pointed to the fact the older products may have exit fees, buy/sell margins, capital gains tax triggers and lose of insurance cover which may be keeping consumers, and advisers, from moving away from products with grandfathered commissions.
The difference of views also extended to AMP, ANZ, NAB and Westpac which also addressed the issues of grandfathered commission in their submissions to the Royal Commission.
AMP referenced the existing contractual obligations for product providers as well as the gradual transition away from grandfathered arrangements as sufficient reason to leave the current system in place, while ANZ stated there was insufficient evidence before the Royal Commission to establish if grandfathered commissions led to inappropriate advice and more evidence was required before considering any changes.
Both NAB and Westpac, however, were in favour of changes taking place during a reasonable transition period that took into consideration the impact on the cost of advice to consumers and the potential damage to financial advisers who may be reliant on grandfathered commissions as part of their revenue stream.