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).
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.