The best and worst thing about the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is that it happened in an election year. However, its recommendations are receiving attention by voters and aspiring policy makers, more than the myriad of other interrogations into the sector over the past 12 months alone.
If used for political point scoring, however, it will not be a roadmap to higher standards and professionalism, but a blueprint for destruction. Debating complex issues through a lens of re-election is short sighted.
The issues here are serious, for both the public and the people working with them on their financial futures. There is a vast ecosystem of astute, ethical financial services professionals who are continuing to do right by their clients, and will continue to do so. What is of concern is the 80 per cent of Australians who do not receive financial advice will potentially be more cautious about doing so in the future, which will be a poor outcome for Australians.
The debate around the removal of grandfathered commissions is a prime example of what will occur in Canberra when the report’s recommendations are used as a political football. The Government’s response to the Royal Commission recommendation, is to phase them out by 2021. Labor now proposes the date for banning grandfathered commissions be moved to a year earlier.
To be clear, the FPA has had as its official policy that the removal of grandfathered commissions needed a transition period and recommended 3 years. FPA member research by CoreData in 2018 tells us 8.3 per cent of adviser-practice cashflow is still derived from grandfathered commissions, and that figure is declining — any new business started after 1 July 2013 cannot have grandfathered commissions at all thanks to the FOFA reforms.
When we formally responded to the Royal Commission’s inquiry into banning grandfathered commissions, we supported the change and provided five conditions to be met.
The first two conditions were that the change is in the client’s best interest – that is, no client will be worse off – and commission payments are refunded into client accounts and not retained by the product provider.
There are two potential scenarios to consider. The first is what happens when the grandfathered commissions end. The primary outcome is that the financial planner will no longer receive that payment – but that doesn’t mean the client will stop paying it. That fee may still be charged and will go somewhere, just not to the financial planner.
Secondly, there’s the risk that clients (as a result of legislation forcing product providers to close products) will simply be moved from one product that is paying a grandfathered commission to another product that does not, but which may not be in their best interest. The client impact of forcing a change of product could lead to tax and capital gains tax liabilities, or loss of social security benefits in some cases.
We must remember ending grandfathered commissions will also affect investors who do not have, or no longer have, a financial planner — unless the cost of product fees are reduced to reflect the end of commissions.
These are just two examples of the tangible, real implications of political point scoring over a complex issue. If the recommendations were made without an election looming, perhaps the right consultation, collaboration and consideration would be invested before making loose legislative declarations.
Whatever discomfort may now be felt across the financial landscape as a result of the implementation of the recommendations will only be magnified if the issues are politicised and treated as currency in Canberra.
With the benefit of hindsight, it may have been better to extend the Commission’s work by six months rather than push it out into an election battleground. However, now that the recommendations have been made, it is of the utmost importance that legislative changes keep the customer’s best interest in sight at all times.