On 28 April 2011, the Assistant Treasurer and Minister of Superannuation, Bill Shorten made a brave and revolutionary announcement: he struck at the heart of the financial services industry money-making machine — by banning commissions and volume-based payments. This day has finally arrived and for commentators who have called for these changes for many years (including myself), it is still tempting to ask: why did it take so long? The historic analysis can wait for another time.
Mr Shorten’s latest ban on commissions and volume-based payments appears to have arrived in the nick of time, or has it? It may be too late for the millions of Australians seeking independent financial advice right now, and not enough for Australians seeking financial advice in the future.
Even when the reforms come into effect, the issue of independence will remain. From the 18,000 or so financial advisers currently operating in Australia, around 80% to 85% of these advisers are employed by, or affiliated to, financial organisations and by definition cannot, and will never be, independent. Financial planning houses that charge asset-based fees for financial advice cannot claim to be ‘independent’, and nor can any financial adviser that continues to receive commissions and volume-based payments from past arrangements which will be most financial advisers operating in Australia. I explain the issue of independence in the article THE SOAPBOX exclusive: Only 7 truly independent financial advisers in Australia.
I have stated many times before, that I personally believe it is impossible to modify a structurally corrupt business model – you have to throw it in the air and create a new model. Even so, well done to Mr Shorten for his determination, although we’re still only at the beginning of a long journey.
Even when the changes come into effect, millions of Australians will continue to pay commissions, and thousands of financial advisers will continue to receive commissions and volume-based payments from legacy products and arrangements.
I believe the changes announced by Mr Shorten are a fantastic and courageous start against a barrage of intimidation from certain interest groups. As I commented in my article THE SOAPBOX: Not the time to quibble (financial advice): “… the financial services industry was given countless opportunities to self-regulate but chose not to make the changes necessary to ensure that consumers received advice that was in the best interests of each client. It’s too late to complain now. Let’s try something new, and if it needs to be tweaked at a later date, then so be it.”
The latest changes announced by Mr Shorten are set out below:
- Ban on commissions on insurance products within super. From 1 July 2013, a prospective ban on up-front and trailing commissions and similar payments for both individual and group risk within superannuation from 1 July 2013. Risk products relate to life insurance and other insurance products offered via superannuation funds.
- Client opt-in every 2 years. From 1 July 2012, a prospective requirement for advisers to get clients to opt-in (or renew) their advice agreement every 2 years. The original announcement was for the opt-in to operate every year, but the 2-year rule is a reasonable compromise to industry concerns over the implementation of this requirement. I have strong views on the opt-in requirement (see my article THE SOAPBOX: Not the time to quibble (financial advice)).
- Ban on volume-based payments. From 1 July 2012, a prospective ban on any form of payment relating to volume or sales targets from any financial services business to dealer groups, authorised representatives or advisers, including volume rebates from platform providers to dealer groups. This is a huge change because the ban will affect wrap/platform commissions which make up a healthy chunk of financial advising revenues.
- Ban on soft-dollar benefits. From 1 July 2012, a prospective ban on soft dollar benefits, where a benefit is $300 or more (per benefit). The ban does not apply to any benefit provided for the purposes of professional development and administrative IT services if set criteria are met. I expect this change will be the Achille’s heel of the reform package, due to the difficulty in indentifying what fits within the ban, and what is excluded from the ban.
- Introduction of ‘scaled advice’. Expanding a new form of limited advice called scaled advice, which can be provided superannuation trustees, financial planners and potentially accountants. Scaled advice is advice about one area of an investor’s needs, such as insurance, or about a limited range of issues.
- Limited exemption for basic banking products. A limited carve out from elements of the ban on conflicted remuneration and best interests duty for basic banking products where employees of an Australian Deposit-taking Institution (ADI) are advising on and selling their employer ADI’s basic banking products. Basic banking products are basic deposit products (e.g. savings accounts), first home saver account deposit accounts and non-cash payment products (e.g. travellers cheques and cheque accounts).
The Government also announced the following:
- Exploration of whether the term ‘financial planner/adviser’ should be restricted under the Corporations Act 2001 (Corporations Act). You can expect an almighty battle over this issue.
- Consultation on the formulation of the statutory best interests duty
- Formulating a replacement for the accountants’ licensing exemption.
The Government released an information package explaining these changes in greater detail. You can access this information pack by clicking on this link.
Over the coming months, SuperGuide will explore these reforms in more detail.
Background: The Government originally (in 2010) announced the following financial advice reforms (and they will also be implemented):
- Ban on commissions and volume based payments (from July 2012). No commissions or bonuses when advising or selling retail investment products including managed investments, superannuation and margin loans.
- Introduction of a statutory fiduciary duty so that financial advisers must act in the best interests of their clients. An adviser must place the best interests of their clients ahead of their own when providing personal advice to retail clients.
- Increasing transparency by charging for advice rather than hiding the cost within other charges.
- Annual renewal notice for advice (opt-in). [Now every two years]
- Restrict percentage-based fees to ungeared products or investment amounts.
- Expand the availability of low-cost ‘simple advice’.