ASIC Grilled Over Due Diligence on Grandfathered Commissions

ASIC has been grilled by the Parliamentary Joint Committee on Corporations and Financial Services over what was implied to be its failure to clearly articulate the complexities – including the human costs – associated with the ending of grandfathered commission payments.

PJC member and Coalition MP, Bert van Manen …grilled ASIC last week over due diligence on the ending of grandfathered commissions

The passage of legislation early last week through the House of Representatives to end the payment of grandfathered conflicted remuneration to financial advisers (see Grandfathered Commissions Ban…) was followed by a PJC hearing at the end of last week, during which a spotlight was shone on the many and varied issues associated with the ending of grandfathered commissions.

During the ASIC Oversight hearing before the PJC, ASIC’s Chair, James Shipton, was questioned by PJC Coalition MP, Bert van Manen, on the effective due diligence the regulator undertook before making a recommendation to the Banking Royal Commission in the Round 2 (Financial Advice) hearings in May 2018 that “…ASIC believes that the grandfathering of commissions should cease as soon as reasonably practicable and to the maximum possible extent.”

During exchanges with Shipton, van Manen, implied:

  • ASIC recommended the banning of grandfathered commissions without having done any serious work to understand the extent of the issue
  • ASIC had failed to include any reference to the significant complexity of the matter

van Manen directed the ASIC Chair to the regulator’s statement, released last month, which announced it would be investigating the progress of transition away from grandfathered conflicted remuneration arrangements (see: ASIC to Review Industry Action on Grandfathered Commissions):

…it’s quite clear …that you haven’t done the work to actually understand what level of grandfathered commissions are in the system

“But it’s quite clear, from the remainder of that press release and the fact that you haven’t done the work to actually understand what level of grandfathered commissions are in the system or what level of revenue is being paid to advisers, that you actually, at this stage, appear to have no idea of the impact on your comments in your submission on the industry,” said van Manen.

In response, ASIC Commissioner, Danielle Press, said last month’s press release was in response to a direction from the Treasurer that ASIC investigate and identify these matters. However, in stating ASIC was seeking to get information back from industry on these questions, van Manen asked “…but surely you should have done this work prior to making these statements in your submission to the royal commission?”

ASIC Executive Director Wealth Management, Joanna Bird, noted the regulator had done earlier work, but which wasn’t as comprehensive as the work it was doing now.

Human Cost

ASIC was also questioned about the potential human costs associated with the end to grandfathered commissions. In an exchange with the ASIC Chair, Liberal MP, Celia Hammond, in noting the lack of detail around the call to end grandfathered commissions contained in ASIC’s submissions to the Banking Royal Commission, asked:

“I think the impact that those changes have had was understated in the submission made to the royal commission. Perhaps it was not fully known at that time, but we know that the changes are having significant impact on people’s livelihoods and people’s lives, so we request, if it is possible, for you to prioritise that work and do it as quickly as possible.

…these are real people. These are people’s livelihoods, and we are cognisant of that

Shipton responded:

“That emphasis is certainly well understood, and you highlight a very good point that we are cognisant of—that these are real people. These are people’s livelihoods, and we are cognisant of that. As I have said in my earlier responses, we are very open to hearing further submissions and further engagements, but that point of emphasis is important, and we certainly take that on board.”

Another line of questioning at last week’s hearing focussed on the potential risks associated with unintended consequences from structural change, including the decline in access to, and affordability of, financial advice.

In acknowledging both these consequences were seen by ASIC as issues that required monitoring, Commissioner Press noted ASIC was ‘…doing a piece of work next year around unfilled advice needs, which is going to take into consideration the changes that we’re seeing within the system today and really looking at: what advice do Australians need, when do they need it and can actually access it?”

  • Nicky Stafford

    Wow! It seems that this realisation is on just coming up, following multiple suicides and the latest poll results that 30% + advisers are planning on not taking the FESEA exam. Ironic that the very institutions that triggered the RC now benefit the most…..DISGRACEFUL!

  • Adam p

    How many times we will continue to see BS government legislation put in place with zero research and ASIC’s incompetence ?
    How about applying the same rules advisers face. 1) know your client & 2) know your product.
    ASIC have clearly demonstrated that they have not researched either at all in relation to GR of Advisers and clients affected.
    What a complete and utter bunch of MORONS are ASIC and this Liberal GOVERNMENT !!!!!!!!

  • WeMustResist

    ASIC was cold-hearted. It was funded enough to listen if it wanted to listen.

  • Walker

    Three suicides already as a consequence of this nonsense. The pink batt’s fiasco drew more media scrutiny and a scapegoat minister lost his portfolio (Peter Garrett) as a consequence. Similar consequences should apply in this instance and in particular, Mr Shipton should fall on his sword.

    For the record, my business’s ongoing revenue comprises just 2% grandfathered revenue so personally, I couldn’t care less. My comments are in support of the rest of the profession.

  • John Edwards

    ASICs response is totally unacceptable. Heads must roll and they should be held accountable in court.

  • John Edwards

    The ASIC response is unacceptable. They need to be held accountable and taken to court for the inadequacies in their process. Heads must roll and urgent attention given to rectifying the implications for the collateral damage they have caused by not doing their job in accordance with the agreed guidelines.

  • A.

    The legislation to ban grandfathered commissions must surely now be placed on hold following the discovery of the lack of assessment and due diligence by ASIC prior to making recommendation to the Royal Commission.
    The regulator made a full and frank submission to a Royal Commission without adequate data on which to base that submission……and Kenneth Hayne accepted it without question.
    This is entirely negligent and has created a false platform on which to base an extremely important decision.
    The level of gross misuse of position in driving an agenda which will not only negatively affect thousands of advisers and their small businesses, but also potentially remove access to affordable advice for tens and tens of thousands of clients across Australia in addition to potentially removing existing benefits and associated strategies of the products these clients are in.
    The grandfathered commissions remuneration was purposely quarantined from continuing on due to FOFA.
    These commission based products and clients have now been decreasing for the last 6 years through natural attrition and strategy changes in the best interest of clients and will continue to do so until they are virtually non-existent.
    This was the specific intended purpose of the “line in the sand” implemented by Bill Shorten as the contractual rights of advisers to receive the remuneration was already in place.
    Bill Shorten recognised this right in the determination to only ban the commission payments going forward.
    Now, the Liberal Govt through Josh Frydenberg have seen it as acceptable to reverse this original decision and to remove retrospectively approved remuneration without adequate or appropriate analysis of the real impact to clients and advisers.
    For the Liberal Govt to state they are the party of small business is simply a blatant lie.
    It is now time for this whole sordid process to be placed on hold and some common sense and real world analysis be applied.
    The process to date has been totally unacceptable and clearly smacks of basic failings yet again by a regulator who appears hell bent on cleansing an entire industry based on ideology rather than logic.

  • GuyM

    My information is that sadly, there have been a lot more than 3 suicides. In buying out my retiring business partners I have paid $300,000+ purchasing old super clients. At a stroke of a bureaucratic pen that purchase is soon worthless. In the meantime, the fund managers that willingly facilitated those sales are now writing to members encouraging them to stop the fees the sales were based on, even though it is the fund managers themselves (not the clients) who are/were paying me from the management fees the clients agreed to pay. Their fees will be maintained. Of course my grandfathered retention fees pale into insignificance beside the taxes the government rips out of those same funds every year.

  • David

    Please someone with commonsense tell ASIC to put the breaks on until it has been totally looked into, not just one small window.

  • Joseph

    And don’t forget the role played by Commissioner Haynes in all this. That person who refused to shake hands with the Treasurer when handing his report to the Treasurer. Furthermore the SC and QC assisting the Commissioner also are to blame for their personal objectionable slants put on their questioning of witnesses at the RC. Shameful behavior typical of people who are BSing rather than questioning to obtaining facts. Obviously someone took a position on GF Commissions early, having been briefed by who knows who, and the SC and QC followed this lead and the Commissioner accepted the situation. What a way to conduct a RC????
    Oh, I almost forgot, it was the Industry Funds which have been against Grandfathered Commissions, wasn’t it. Did they get to brief the Commission at some early stage???

  • alex

    16 suicides period covering Jan-July 2019 (over 2 every fortnight). I have contacted 3 different politicians about this epidemic as a result of the royal commission and asic. None of them bothered to respond.

    • Ken

      That is astounding not to mention alarming as there is no end in sight to this blatant attack on advisers to cover up the mis management of so many agencies companies and politicians
      We have special days called RUOK days and the government gets behind them at least to show some interest as it’s not something that should be ignored by anyone let alone our government representatives BUT WHEN ITS PUT ON THEIR DOORSTEP THEY IGNORE IT AND HOPE IT GOES AWAY
      I wonder how this would be handled if passed onto 60 minutes? Who’s going to explain the so called rationalism of this legislation and the deaths it has caused.
      I pity poor senator Hume who has inherited this BS from her predecessors who are now off doing damage somewhere else in a new portfolio
      Sooner or later someone has to be held responsible for this terrible situation that has no end in sight How many more innocent lives need to be lost before some sanity is shown
      Come on FPA and AFA take a stance here and get stuck into them or it will get worse

  • Concerned

    If an adviser did what ASIC has done, they would run the risk of ASIC imposed penalties including not being able to provide advice for a term. So when ASIC does not meet its Best Interest Duty, who is it accountable to? Evidently, ASIC’s response seems to be – do as we say, don’t do as we do. My concern is that they will take this out on the adviser. Nevertheless, well done Bert van Manen for exposing ASIC’s shameful conduct.

  • Ten Beers

    So many great comments and Joseph especially. With terry at Dover exploring the Incompetence of ASIc and their breachs of freedom of information, im looking forward to an expose some day soon. However the wheels are in motion and the damage has been done, the loss of trust from the public is far over the top…damage done. In this whole news piece asic are showing contempt and incompetence to the future of Australians. The unintended consequences are huge and they say they will monitor them, but thats too late!!!! they dont get it. Advice is only for the wealthy and those in need wont get it. No longer can afford to serve much of the population………very sad!

  • John Ardino

    Mendacity and Hypocrisy. First Lie. The Explanatory Memorandum announced that the Financial Impact of the Bill is: “None”. Yet this misconceived RC recommendation will have a greater financial impact on small business and on clients than any other recommendation from this RC. Indeed perhaps greater financial impact than any previous advice law.

    Second lie: “Treasury has undertaken a process equivalent to a Regulatory Impact Statement through the RC”. Yet the RC utterly failed to collect any objective data or case studies on GC and totally ignored Paragraph K of the Terms of Reference which DIRECTED the RC to assess impacts on the economy generally, costs and access to financial services for consumers, competition, and financial system stability. Haynes too it upon the Commission to make a financially momentous recommendation to abolish GC without data, analysis and assessment of impacts as he was directed by the Governor General. Surely that alone invalidates the recommendation and was a good enough reason for the Government to reject it. It is also a good enough reason in itself for the Senate to reject the Bill.

    When you add all the other many arguments against this legislation, such as impacts on consumer advice costs and reduction in advice access, not to mention bankruptcies and suicides etc, the reasons for the Senate to reject the bill or at least request further investigation are overwhelming. Yet instead of being a House of Review, I suppose most senators will simply not engage with the issues and vote on party lines. This is incredibly disappointing for a Senate which after US Congress is regarded (or regards itself) as one of the most powerful and presumably independent in the world.

    In blunt terms, this legislation is equivalent to arbitrary expropriation of adviser property rights without any compensation let alone just terms. In other words government thuggery. Combined with a plan to try and get the fund managers to exercise any discretion they may have within their distribution agreements to switch off trails before the legislation takes effect. Is that why Haynes and Frydenberg state that there will be nothing to acquire? If trails are switched off legitimately by fund managers under subtle pressure from ASIC acting on behalf of Treasury, then indeed the property rights are extinguished. The government probably cannot be sued for the tort of unlawful interference in private contracts. Remember too that the legislation seeks to abolish Section 1350 which is apparently designed to protect small advice businesses from having property rights taken away by institutions without compensation on just terms. This legislation is trying to take away any rights advisers may have to constitutional protection.

    This is pretty ugly dirty politics and not worthy of the Australian Parliament which is acting like a dystopian authoritarian state. Labor has betrayed advisers by going against the advice they received in 2011 from the Solicitor General and Frydenberg has just ignored this previous advice by planning to bypass it.

    I normally don’t protest but the extreme injustice of this legislation has made me very angry. I am quite stunned that some good lobbying and well researched submissions by our various professional bodies have had very little influence on government and the RC. I don’t understand why the reaction from planners has not been much more vocal. Perhaps it’s just demoralisation.

    The only real argument in the Final Report was that GC constitute a conflict of interest which are best eliminated as they cannot be managed. But Vertical Integration is an even bigger conflict of interest and was allowed to continue because to abolish it would be disruptive. How inconsistent and unfair to planners!. I think the view that conflicts have to be eliminated is probably the dumbest thing Haynes said. Conflicts exist everywhere. Hourly rates are major conflicts. Just look up what the Chief Justice of NSW Jim Spiegelman said in about 2005 about legal charging structures. Or what Adam Smith said about professionals or George Bernard Shaw (“professions are a fraud upon the laity”). I’m not against professionalisation but unfortunately there is also a dark side to professionalism as we can see in legal overcharging, medical over-servicing etc etc.

    I recall that our political masters rely on donations. Noone can say they don’t constitute serious conflicts. Have they been eliminated? Conflicts are inescapable in every aspect of human activity. Life every moment is a balance of conflicting forces. To eliminate conflicts is to eliminate life. So Haynes’ argument in my view is total utter BS, hypocrisy and just a further expression of the hatred of financial advisers which has unfortunately infiltrated society, politics and the media at large while according to ASIC Report 627, 89% of our actual clients want more advice!

    Can the process of professionalisation be right when some serious estimates are that up to 10,000 advisers out of 27,000 will leave the industry, advice costs will rise, dealer costs have risen and advisers are going bankrupt and killing themselves in unprecedented numbers? Meantime the millions of clients with trillions in super and ordinary investments needing advice will find it harder to be accepted as clients and if they are accepted will have to face paying much more – a situation whereby the conflicts of commissions are replaced with the standard conflicts of the fee gouging professions. A simple example. My firm needed a small consulting ($12,000) assignment from a big firm. The quoted cost of just producing the engagement contract was $4,000. Is this what planner fees for the wealthy are heading towards? Such is progress!

    • Ken

      What a great and well constructed observation my greatest applause to you on your comments something I could never have put in words as you have
      Please keep up your comments and advice someone sometime and someway will and have to respond
      Great words an understanding of the situation
      Thank you

      • John Ardino

        Hi Ken thanks very much for your kind comments. We are lucky that the legislation has not yet passed the Senate and we have almost a month to lobby senators, which may not do much good but at least it will tell them what I think they need to hear. The legislation amounts to expropriation of advisers’ property rights but with the repeal of Section 1350 advisers may have no recourse if fund managers turn off trails under pressure from Treasury. So the constitutional challenge may be defeated even before it starts because fund managers will remove our property rights and so there will be nothing for the government or fund managers to have to acquire and compensate as per the just terms section of the Constitution.

        I find it pretty nasty when a modern government develops a strategy to defeat its own Constitutional provisions from applying to citizens and uses the regulator to interfere in private commercial contracts. This seems to be the intention of the government as far as I can tell.

        Amazingly the fact that Haynes failed to follow the Terms of Reference in arriving at his recommendation doesn’t seem to have found its way into the mainstream media. Financial planners are of so little account that he thought he could make this recommendation without gathering any objective data other than what was in ASIC’s submission to RC which I understand was minimal, and there would be no objections. He was right! Although our professional bodies have objected they have been ignored. Their reasonable solution to delay this three years to give advisers time to review all trail clients, which would have overcome most difficulties with trails, is considered too generous by the government. Some clients will suffer and be considerably worse off, but that does not seem to matter.

  • Dave

    The irony here is that ASICs “Ethics” has to be seriously questioned, perhaps they should be talking to Fasea? Who’s Best Interest is this in?