Trailing commissions, volume rebates and other sales-based payments to financial advisers and Australian Financial Services Licensees (AFSLs) would be banned from 2012 under proposed legislation announced by the Rudd Government.
The prospective ban on commissions and volume-based payments relates to retail investment products including managed investments, superannuation and margin loans. While payments relating to insurance advice (including group insurance) were not included in this round of reform, they are on the Government’s radar.
The reforms, announced by the Minister for Financial Services and Superannuation, Chris Bowen, also extend to payments relating to sales targets, including employee sales targets — something that could affect the remuneration of salaried financial planners, such as those employed by banks.
Bowen said the new adviser charging regime would retain “a range of flexible options for which consumers can pay for advice”. Percentage-based fees would be allowed, but only for un-geared products or investments, and only through agreements with clients. The new regime will not restrict “client-agreed deductions being allowed from a client’s investment to pay for financial advice”.
“While these deductions from a client’s investment would need to be facilitated by a product provider, this is not a commission, as the remuneration is not set by the product provider,” Bowen said.
The new legislation would require advisers to express total charges payable by the client in dollar terms. Clients must also agree to pay the fees on an ongoing basis through an annual renewal notice, forcing advisers to ensure clients being charged ongoing fees receive ongoing services.
Payments between platform providers and advisers or licensees that are not based on volume will continue to be permitted.
The Government’s proposed reforms also include the introduction of a statutory fiduciary duty for advisers. Bowen said that would require advisers to take ‘reasonable steps’ to discharge their fiduciary duty, while adding advisers would not be “expected to base their recommendations on an assessment of every single product available in the market, which would be impractical and costly”.
“If the adviser cannot recommend a product that is in the best interests of the client from their own Approved Product List … then the fiduciary duty may require them to search beyond the Approved Product List or recommend that the client should see another adviser.”
The Government’s reforms stopped short of addressing soft dollar benefits received by advisers, but did flag the creation of an ‘expert advisory panel’ which would consider soft dollar payments in the broader context of ethical and professional standards.
“Treasury will advise Government [about] the best way of extending the ban on conflicted remuneration structures to material soft dollar payments,” Bowen said.
The provision of ‘simple’ or ‘intra-fund advice’ would be extended to areas including transition to retirement, intra-pension advice, nomination of beneficiaries, superannuation and Centrelink payments and retirement planning generally. Bowen also flagged a review to examine whether “simple advice can be provided in a compliant matter outside intra-fund advice”.
The Australian Securities and Investments Commission (ASIC) would also have strengthened power to act against “unscrupulous operators”. Bowen said ASIC would be able to take into account a broader range of matters when determining whether to issue, cancel or suspend a licence, as well as in its treatment of individuals.
The potential for a new statutory investor compensation scheme would also be explored, Bowen said.
The proposed reforms are the Government’s response to the Parliamentary Joint Committee on Corporations and Financial Services (also known as the Ripoll Inquiry), which took place last year in the wake of the losses suffered by investors exposed to Storm Financial, Basis Capital and Opes Prime.
