AFA Challenges RC on Banning Grandfathered Commissions

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.

AFA GM Policy and Professionalism, Phil Anderson… challenging the basis of the Royal Commission’s position on banning grandfathered commissions

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 commissions 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.

  • Andrew

    noun: intermediary; plural noun: intermediaries
    a person who acts as a link between people in order to try and bring about an agreement; a mediator.
    “negotiations took place through an intermediary”

    Advisers ARE intermediaries – they are employees of a Licensee (AFSL).
    All advice is provided by the AFSL; the Authorised Representative (the adviser) on behalf of the AFSL is representing the AFSL UNDER AUTHORITY: by definition then the Adviser is an intermediary between the AFSL & client.
    The client even pays fees or the product pays commission TO THE AFSL – not to the Adviser.
    The AFSL then pays an amount to the Adviser (intermediary) as per the Agreement between the AFSL & the Adviser. This could be an Employee Agreement, a Principal Practise Agreement (to a CAR), or an Agency Agreement.
    The amount that is paid from the AFSL to the Adviser also may vary from client to client (percentage terms) as the Advisers total revenue to the AFSL increases.
    What part of NOT being an intermediary is misunderstood?

    • Matt Robertson

      WOW – Thanks Andrew, the member for Scullin.
      It’s obvious that your business and livelihood is not being torn apart by a Royal Commission into BANKING! misconduct.
      I hope you enjoy the encouraging feedback to your post.

      • Andrew

        Well, I am not the member for Scullin.
        I also note that you did not contradict my SOLE observation that Advisers are intermediaries. Is this because you can’t find a valid argument against it?
        Further, my post was not about grandfathered commissions etc. It was about the AFA proposing legal action on the grounds the RC had mentioned Advisers as intermediaries.
        It serves purpose to mount a legal challenge if your arguments-in-chief can be easily refuted. Instead, find something that at least has the opportunity to be argued or something that can’t be refuted (i.e. your assertion that I am the member for Scullin – I am not, therefore your argument LOSES).
        But if you want to go into Court and argue something that you will lose, instead of looking for an argument that you might win – your call.

        • Leighroy

          Settle petal.

    • bigal

      I think you are forgetting that the word “intermediary” can be applied in many situations, it is a generic term. Financial advisers are officially “authorised representatives” of their particular AFSL.
      The AFSL is responsible for the adviser’s conduct but the adviser is clearly NOT an employee of the AFSL. If they were, the AFSL would have to deduct PAYE tax and pay the SGC super among all the other employee benefits.
      This issue was recently clarified in a court case.

      • Andrew

        Not correct.
        The Court examines the specifics of any single employment arrangement and are unique to each case. You can’t say that just because this case was found to be such and such, therefore all cases will be the same.
        I am a Director of an AFSL and we employ 8 Advisers, all on Employee Agreements. We pay PAYG, Super, Workers Comp, Annual Leave etc.
        Further, Banks employ only salaried advisers (employees), except for some of their ‘independent’ licences, whereby the advisers are still covered under a CAR.
        Under an independent licensee there is a CAR in place and the Advisers are in turn under that.
        There are SOME advisers that operate under agency agreements, typically with Life offices.
        An intermediary is the person between parties bringing about an agreement. But Haynes didn’t specify to which type of intermediary he was referring.
        And the reality is that an intermediary is exactly what advisers are – the law is quite clear that the AFSL is the provider of advice and the adviser is an authorised REPRESENTATIVE of the AFSL. So, intermediary or representative – take your pick, it’s all the same.
        If we had a licensing regime that provided for personal licensing then the ‘intermediary’ objection may be a valid argument. But we don’t.

  • Jzee

    Its about time they came out swinging! People have short memories of how all this came about when our friend Bill Shorten was Minister of Financial Services!

  • ken

    The issue that seems to have been formed and pushed down the publics throat is that Grandfathered commissions are someway the same as fees for service { or rather no service} and are a blight on the consumers account.
    The truth in this is many advisers attended meetings in the 1980’s when agents as they were known then were actually employees of a particular insurance company in my case MLC and they decided a tied agency agreement was no longer viable and came up with the adviser tag effectively making us contractors and responsible for our own tax etc etc Part of this agreement was that we would be paid an ongoing portion of a fee as a commission to assist us in transition but also to help us structure a business that could grow and be a saleable asset in the future. I dare say there was some thought put in by them at that stage to also ensure retention of the business.?
    Now like the 76 changes we have had in super over the past 25 years the people who have no idea of the past situation and the destructive effect this will have on business’s and families not to mention the clients who can no longer be serviced for free decide to paint the whole fee and Grandfathered payments lot with the same brush. According to them no body does anything for their clients they just keep getting paid for nothing ?? What a small minded approach.!
    If this is not a breach of constitutional rights what is? I applaud the AFA on this and encourage them to keep at it I am sure they have every advisers support.

  • PS

    In 1992 Lumley Life arranged agency agreements wherein renewal commission would be guaranteed to paid to the ‘writing’ agent for the life of the policy or for as long as the client pays the risk insurance premiums. This has carried through to 2019 on the legacy book of business now in the hands of TAL.

    The confusion here is how political governance can suddenly override a legally binding contract set in place 27 years ago?

    The main issue with ‘grandfathered’ commissions/fees under FoFa related to deducting amounts from people’s investment account balances.

    Advised retail risk only insurance premiums are not deducted from investment account balances. They are paid as non-deductible or [where permitted] deductible premiums. The ONLY time they are paid from existing super fund assets is where the client has agreed to have them paid [where permitted] as a partial roll over from an existing super fund account balance. This only eventuates once the adviser has clearly demonstrated within an SoA signed by the client – that it is in the clients best interest to pay the relevant premiums in this manner.

    To unilaterally ‘ban’ ALL commissions including ongoing risk insurance commissions definitely should be challenged on both constitutional grounds and on a contract law

    Whilst it does not suit all adviser circumstances, I have voluntarily chosen to agree to remove ‘grandfathered’ commissions/fees as potentially conflicted income. But to do so in respect of retail risk only insurance on advised client business is nonsensical. The servicing commission I receive covers annual client reviews, claims handling, premium dishonours, change of policy ownership, frequency and payment method changes as well as policy alterations including reductions and benefit deletions.

    Banning all existing policy renewal commissions and supposedly replacing them with a ‘fee for service’ is preposterous.

    Simple example – under the no more servicing commission scenario: a client wants to change or reduce cover to save premium cost. To do so with their existing policy means I have to charge them an extra fee on top of the proposed reduced premium cost to deliver the outcome they came to me to achieve in the first place. Potentially pay MORE in total to achieve an actual premium reduction. In what universe does this make any sense at all? It doesn’t!

    • Sam

      But the ‘writing’ agent may not be the person to whom the commission is now accruing. If I bought a client book that had some old Lumley policies, and I have never met those clients, should I be getting a Trail from that old policy?
      As for the legal challenge – there is nothing to challenge until Legislation is written and granted Royal Assent. Prior to that there really isn’t a whole lot for the High Court to review. Well, unless you can convince them to review unwritten legislation that is still nothing more than a proposal, with differing proposals by different Parties.
      The premise that the Royal Commission recommendations should be challenged on Constitutional grounds (Section 51 (xxxi)) also needs to be thought out a little better, in my opinion.
      That section deals with the ‘acquisition of property on other than just terms’ BY THE COMMONWEALTH. But the ‘Commonwealth’ wouldn’t be ‘acquiring’ anything.
      Further, ‘property’ isn’t being acquired by anyone. It could be said that one party is being prevented from receiving a benefit – but that isn’t acquisition of property.
      Finally, the ‘just terms’ of the Section requires the Court to consider the effect upon all interested parties – not just those persons being dispossessed of property. Ultimately the terms must be ‘just’ for everyone.