Different sauce for the industry funds gander

13 April 2017

What is the difference between a ‘rebate’ and a ‘commission’ and is a different standard being applied to the ‘risk sharing rebates’ paid to industry funds by insurers?

Are so-called “risk sharing rebates” between industry superannuation funds and group insurers equivalent to financial planners receiving a commission and, if so, should those receiving them be pursued by the financial services regulators, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA)?

Many readers of Money Management believe “risk sharing rebates” are tantamount to a commission and they have used the comments section on moneymanagement.com.au to suggest that what is good for the goose (financial planners) ought to be good for the gander (industry funds).

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For years, angry financial planners have claimed that industry funds have been receiving kickbacks from the major group insurers and submissions and responses delivered to the Parliamentary Joint Committee (PJC) on Corporations and Financial Services has served to confirm the existence of the “risk sharing rebates”.

According to both industry funds spokesmen and the life insurers involved, the rebates are not in the nature of a commission or a kickback but instead, the “arrangements may involve payments to or from their insurer depending on their claims experience. For example, insurance premiums for an annual period may be adjusted after the end of that year once the claims experience is known, to reflect that claims experience” – something known as the ‘Premium Adjustment Model’.

What is acknowledged, however, is that such arrangements usually entail a rebate which is paid by the insurer to the superannuation fund.

It is, of course, argued that the difference between such “rebates” and the payment of commissions to planners is that the rebates are paid into the coffers of the superannuation funds rather than to any particular individual.

This may be so, but it is arguable that such arrangements should nonetheless be fully disclosed via annual reports to members, including the manner in which the resultant funds were then utilised, particularly if they generated cost-savings or more services to members.

And given that the rebates generally flow back to superannuation funds in circumstances where agreed cost-savings have been achieved, the fund trustees might also care to share with members the nature of those cost-savings.

Greater transparency would give not only superannuation fund members greater visibility, it would also serve to ensure the regulators could satisfy themselves that the rebate arrangements fall within the terms of the sole purpose test and other elements of the Corporations Act.

While the Government has spent a good deal of time arguing for higher standards of governance of superannuation funds and while the Productivity Commission is currently examining superannuation competitiveness and efficiency, neither process has thus far drilled down to the nature of some of the commercial relationships between super funds and their suppliers.

In the meantime, planners need to recognise that the Coalition Government has effectively abandoned any intention it had of amending the Future of Financial Advice (FOFA) changes overseen by Bill Shorten when he was Labor’s financial services minister.

While the Abbott Government sought to change the FOFA legislation by regulation in 2013/14, those regulatory changes were disallowed in the Senate and have well and truly fallen off the Coalition’s agenda.

Anyone doubting this need only read the media releases of the Minister for Revenue and Financial Services, Kelly O’Dwyer and her most recent references to the status of the life insurance commissions grandfathered under the original FOFA deal.

The minister now refers to the fact that commissions paid on the sale of life insurance products were “originally left out of the FOFA reforms”.

“The Turnbull Government has acted to address the risk that commissions on the sale of life risk products will incentivise advisers to act in a way that is not in the best interests of their clients,” the minister said.
It represents a substantial change in ministerial rhetoric and one that is unlikely to change given the nature of the current political cycle.

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Great article Mike, pure facts that the ISA, Labor and now unfortunately the most left-wing Liberal Gov we've ever seen has chosen to ignore.

Thank you for being the voice that even our supposed 'professional bodies', the FPA and AFA, have not been.

You must be the only one who thinks that the payment of commissions to incentivise financial advisers was benign and innocent, and did no harm to the reputation of professional financial advisers. Most of the dirty works that has now come out into the open was not about industry super funds. In fact, it is hard to recall any industry fund supernatants complaining about their super fund in stark comparison to the 'other side'.

Nevertheless Mike has made a strong point about the need for transparency by industry super funds. But the same should apply to the 'other side' (then listen to the screams).

I agree with your last paragraph and that is a good thing.

Hedware (appropriate moniker) I see you also practice comedy, like the unions. At least you had the good grace to phrase it 'that has now come out', as we saw with the Union enquiry that they have no hesitation in destroying incriminating evidence regardless of any legality around this. Next you will be saying another punchline that the ISA not in bed with Unions, or that they are different and squeaky clean... Check the history on the Comminsure fiasco which centred mainly around the insurances within Industry funds and how they traded reduced member protection benefits for better 'rebates' that they never passed on. But hey, that isn't as bad as advisers accepted commission remuneration, is it? In your version of reality (aka La La Land) if commissions were removed, Australians would all pay for insurance advice leading to better insurance levels per capita, there would be no financial scams or aberrant fraudulent behaviour in our sector because somehow that would have solved the problems of ethics and unscrupulous operators... If you believe that, I have a bridge to sell ya, and will even forego the commission!

Hedware - RE: your comment about industry fund members rarely complaining about their super funds - you do realise that the average industry fund member has a balance of approx $20k, usually has multiple accounts with other industry funds and is generally apathetic (or clueless) when it comes to super. They've been put in these funds under our modern awards system. You can't complain about something you know nothing about and don't care about. They believe the inaccurate compare the pair advertising because they don't know any better but feel good because someone is telling them the fund they're in is better than the evil retail funds.

That's a very uncharitable and churlish way of looking at supernatants. Not much point in a discussion is that is your starting point.

Oh, you mean reality as a starting point? Yes I can see why you would say that Hedware, brainless opt out of a difficult convo.

Joe - I agree with you re insurance scams and the sorry business of super funds (both industry and retail) getting involved (usually covert) with the insurance industry. Financial advisers get enough bad publicity without the added burden of the sorry reality of insurance practices.

I am quite prepared to have a go at industry super funds. My comment was to give a bit of balance. I find that those who fearlessly back the retail funds sector do so blindly and one-eyed.

I will buy your bridge if you come clean and talk about the many undisclosed incentives used by retail super funds to get clients.

Great!! Let's make it two bridges as you appear gullible, and as an 'incentive' (see, not such a dirty word, is it?) cash in large bills will get you a discount.

TBH I really don't care for retail super at all, but by the same token, incentives used by retail fund to gain clients? Shock, horror - commercial organisations incentivising to gain more business? Terrible! Next you will tell me that it's wrong that Australia is a democratic, capitalist society where market forces and customer free will should dictate...

Having said that, at least those companies are open about their goal i.e. profits and shareholder returns (you know, the things called shares that the ISA funds actually invest in - now that isn't hypocritical at all, is it?), as opposed to ISA not quite truths about being 'not for profit' or the other great porky pie, 'for members'. Meanwhile, huge sums of 'rebates'. 'incentives' and even 'indirect member fees' (the latter show up not on member statements but generally hidden deep in the fund's financial statements that have to be requested, and then interpreted, with no clarification on what that actually means). Of course these monies don't profit the members at all, but rather the Director's, staff of ISA and ancillary groups (ie Unions then onto Labor), but when queried they try to get around the 'not for profit' & 'for members' slogans by saying that doesn't refer to these types of income... aha. Go figure. Cake + Eat it too

Love how the ISA and their cronies throw rocks at the 'retail' sector and hypocritically try to claim the squeaky clean, moral high ground and yet get under that shiny white veneer they try to protray and their underwear is soiled and filthy like a back alley whore.

There's no issue with financial advisers asking and charging a fee for service from a client. All open, direct and transparent. The problem comes about when the client does not know if the advisor is recommending a course of action because that adviser will get an incentive payment. So the advice is biased and may not be in the overall best interest of the client.

Honest financial advisers also get penalised because of the rorting done by some advisers to get incentive payments or spotter's fees.

I've no personal interest or stake in industry funds at all. I have a stake in challenging the myopic view that retail funds are all good and honest when there's plenty of contrary evidence. The financial advice industry and its professionals became handmaidens to the funds and insurance industries and ended up suffering lost of position and relevance. The executive ranks of retail funds never got punished for their poor behaviours.

I am just sticking up for the good and worthy financial advisors who are out there. Financial advisors need to stand up and not to be craven to the retail funds. Kowtowing to them by the likes of you are not helping.

Au contraire, Hedware, we don't kowtow to retail funds at all however pointing out pure commercialism, market forces and competition (within defined legislation) and the free will of consumers is my agenda - plus pointing out the blatantly wrong BS propagated by those on here defending union run industry funds.

The simple reality zealots within our industry forget is that without the political clout and financial resources the big players (yes, institutions owning retail funds & distribution channels), our cottage industry of 'Financial Planning" (how else would adequately describe our disorganised, non-uniform, non-self-regulated, discordant 'profession'?) would be a very quick kill for the Unions/ISA/Labor. That isn't in the public interests, but their own.

But sure we even need the zealots like you as well to push new frontiers and challenge our thinking - however not at the expense of other's rights and ability to pursue their own commercial interests. Like in religion, those most extreme in their views, who believe that other doctrines not akin to their own are 'wrong' are often the most harmful, especially when they become blinded by their own vitriol and mantra.

My view, as opposed to kowtowing, (and if you saw the advice we offer clients you would realise how erroneous your statement was) is live and let live, and that there is a fundamental place for everyone around the table, as long as all abide by the same rules and act in the client's best interests within the spirit of the legislation.

Well written Joe!

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