InFocus: Ending grandfathering – who really wins?

The Australian Securities and Investments Commission (ASIC) has been tasked by the Government with investigating the manner in which financial services companies transition away from paying grandfathered conflicted remuneration.

But, crucially, it seems unlikely that ASIC will focus more on process than on who, ultimately, ends up being the beneficiary of the ending of grandfathering and the bottom line is that the financial advisers who lose the grandfathered payments will have little say in the matter, but that the financial product manufacturers will.

This is because the underlying legislation, the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill “allows for regulations to be made that provide a scheme under which benefits that would otherwise have been paid as conflicted remuneration are rebated to affected retail clients”.

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But, just as importantly, the explanatory memorandum accompanying the bill makes clear that it is product issuers who will be responsible for those schemes and, to a large degree, how they work.

Little wonder, then, that the major financial adviser bodies such as the Financial Planning Association (FPA) have been at pains to point to the need for product providers to be closely scrutinised around their implementation of the rebating process.

The FPA more than four months ago used a submission to the Treasury to urge that it [Treasury] “carefully design the mechanism to achieve and monitor rebating in order for it to minimise disruption and unnecessary administrative costs”.

The FPA’s submission noted that the Government’s announcement to end grandfathered commissions included a commitment for any previously grandfathered commissions that remained in contracts beyond 1 January, 2021 to be rebated to applicable clients where the applicable client could be reasonably be identified.

It also noted that the draft legislation released by the Treasury included an ability to make regulations to achieve this but not details about the mechanism itself.

“The FPA supports this commitment but notes that product providers must bear primary responsibility for the rebating arrangements. The burden of managing rebating arrangements cannot fall on consumers, who do not have a choice in how these arrangements are made, nor on financial advisers, who will already be dealing with a loss of commission revenue and adjustments to their business models,” the submission said.

It said any additional cost to financial advisers through the rebating process was likely to be passed on to clients in the form of higher advice fees.

The submission said it was important that product providers had an obligation to rebate commissions and to appropriately migrate consumers from legacy products to modern, fit-for-purpose products.

“Treasury will need to carefully design the mechanism to achieve and monitor rebating in order for it to minimise disruption and unnecessary administrative costs. The FPA strongly urges Treasury to consult with the financial services industry over the proposed rebating regulations as soon as possible.

“However, that consultation has not occurred, and the industry is now faced with the processes which will be followed by ASIC as it looks at the steps being taken by the product providers between 1 July, this year and the 2021 deadline for the ending of grandfathered remuneration.”

According to ASIC, its investigation will consist of:

  • Surveying entities known to pay grandfathered conflicted remuneration to Australian Financial Services Licensees or their representatives, requiring entities to provide data for a 12-month period initially and subsequently on a quarterly basis for the review period; and 
  • Detailed engagement and analysis.

The regulator is then scheduled to analyse the results of its survey and report to the Treasury by 30 June, 2021.

In other words, grandfathering has been brought to an end, ASIC will have monitored the process but, as yet, no specific methodology or process has been outlined.

In reality, of course, grandfathered remuneration is estimated to now represent less than 10% of revenue for most, average advisers and many of the largest product manufacturers have already begun winding back the remaining grandfathered arrangements.

The question is, though, what proof is there that consumers will be the ultimate beneficiary?

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