March 1, 2019
The Association of Financial Advisers has issued a detailed statement in which it argues that the Banking Royal Commission’s position on banning grandfathered investment and superannuation commissions could be challenged on constitutional grounds.
Having earlier addressed what it believes to be errors, misunderstandings and ideological bias in the Banking Royal Commission’s position on the future of life insurance commissions (see: Errors, Misunderstandings, Bias…), the AFA, through its GM Policy and Professionalism, Phil Anderson, is championing the argument that the Royal Commission’s recommendations around banning grandfathered commissions – and logic that underpins its recommendations – is flawed, contradictory and potentially unconstitutional.
In his statement, Anderson takes issue initially with two of the six general rules articulated by Commissioner Hayne in his Final Report, which state:
- Intermediaries should act only on behalf of, and in the interests of the party who pays the intermediary
- Exceptions to the ban on conflicted remuneration should be eliminated
Anderson challenges the term ‘intermediary’ to describe a financial adviser as they are primarily providers of a service called financial advice:
“Whilst financial advice may include the recommendation of financial products, I simply do not believe that financial advisers are intermediaries for product providers.”
He points out that financial advisers are also subject to stringent rules that are designed to ensure that they operate in the best interests of their clients, namely:
- The Best Interests Duty (Section 961B)
- The obligation to prioritise the interests of the client when there is any conflict between the interests of the adviser (or related/associated entities) and the client (Section 961J)
Anderson says Commissioner Hayne is suggesting that intermediaries (financial advisers) should act in the interests of product providers and not their clients. “This cannot be correct,” he concludes, adding:
“In the context of the knowledge that financial advisers and mortgage brokers do receive payments from product providers for life insurance and mortgages, it just seems such a confused proposition to suggest that they need to act in the best interests of the product provider. This intermediary rule would only work if conflicted remuneration was fully banned, however the Commissioner has acknowledged the continuation of commissions for life insurance and mortgage broking, at least for some time. How can these rules therefore apply universally?”
…what the Royal Commission has argued “…has holes in it”
Expanding on his argument, Anderson challenges what he perceives to be an ideological determination by the Royal Commission to eliminate all conflicted remuneration – believing this position is “…disconnected from the real world” – and he outlines arguments to support his position.
Anderson laments what he believes to have been no genuine debate in the media or in Canberra on the issue of conflicted remuneration and to whom the intermediary owes a duty. Notwithstanding this perceived lack of debate, Anderson notes he believes it’s apparent that what the Royal Commission has argued “…has holes in it”, and that it will not work in the interests of consumers in all cases:
…where such exemptions are in the best interests of consumers, then they should be allowed to continue
“It is obvious that the most sensible position on conflicted remuneration is that it should be eliminated in cases where it is not in the best interests of consumers,” said Anderson, before adding, “It is clear that the Commissioner wants simplicity and the avoidance of exemptions, however where such exemptions are in the best interests of consumers, then they should be allowed to continue.”
Anderson adds further arguments in relation to the lack of evidence – at least at the Royal Commission hearings – that grandfathered commissions are linked in any way with poor advice.
He also refutes Commissioner Hayne’s argument that there is no basis to argue the existence of a constitutional issue in the Government legislating to ban grandfathered commissions, citing what he believes to be clear evidence to the contrary, including the then Financial Services Minister, Bill Shorten’s statement in an August 2011 media release on the Future of Financial Advice reforms, in which he commented:
“…the ban on conflicted remuneration … will not apply to existing contractual rights of an adviser to receive ongoing product commissions…”
“Following legal advice from the Australian Government Solicitor, the Government has determined that the ban on conflicted remuneration (including the ban on commissions) will not apply to existing contractual rights of an adviser to receive ongoing product commissions.”
Anderson presents an argument as to why advisers have a constitutional right to continue to receive grandfathered and also why the Royal Commission’s Final Report that argues no constitutional barriers to banning grandfathered commissions is illogical.
He concludes his statement by saying small businesses in the sector and their teams deserve some clear answers on these issues on conflicted remuneration, intermediaries and grandfathered commissions. “If grandfathered commissions is as big an issue as the Royal Commission has suggested, then why wasn’t ASIC looking at it over the last five years and how is it going to be solved in a way that benefits clients and treats financial advisers fairly. There are too many unanswered questions and this is being pushed forward by all parties at a disturbing rate,” said Anderson.
Click here to access the full statement from AFA GM Policy and Professionalism, Phil Anderson.