It is only a few short months ago that the managing director of ClearView, Simon Swanson nominated the removal of commission payments to life/risk advisers as being the sort of black swan event which would serve to significantly disrupt the industry.
Swanson’s comments about the threat to life/risk commissions were predicated upon the manner in which mortgage brokers had been treated during the first round of hearings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The ClearView boss could not possibly have known what was going to occur when the Royal Commission began dealing with the financial planning industry, but the reality is that those hearings served to multiply the pressure for the removal of virtually all forms of commissions in the financial planning space, including those applying to life/risk products.
It will be many weeks and many hours of further hearings before the Royal Commissioner, Kenneth Hayne, delivers the first round findings and recommendations from the Royal Commission but the Financial Planning Association (FPA) appeared to acknowledge the inevitable when it filed a submission suggesting that, perhaps, the time had come to begin a three-year phase out of the commissions which had been grandfathered under the Future of Financial Advice (FoFA) changes.
It is worth recognising, however, that the FPA took a very different view of the life/risk commissions carve-out, suggesting that they should be retained at least “in the short to medium term” to allow for the full implementation of the Life Insurance Framework (LIF) and the consequent review to be undertaken by the Australian Securities and Investments Commission (ASIC).
As mentioned elsewhere in this edition of Money Management (Editorial, P2) the FPA’s submission was met with strong criticism by financial planners but, in many respects, it represented a pragmatic recognition of the fact that much of the Royal Commission testimony around fee for no service, which served to taint AMP Limited and the Commonwealth Bank, was borne of the perception that a gaming of grandfathering had occurred.
Hence, the FPA submission stated: “Ongoing fee arrangements where the ongoing advice is not provided contravene reasonable community expectations, regardless of whether they are technically grandfathered. The FPA would support the removal of grandfathering for ongoing advice fees and all ongoing advice fees being subject to the opt-in requirement.
“Grandfathered commissions has led to an environment where many clients are paying fees and yet receiving no services. Ceasing grandfathered commissions and making all ongoing fee arrangements subject to opt-in will result in grandfathered fee arrangements quickly coming to an end where no services are being provided to consumers.”
The Association of Financial Advisers (AFA), while equally critical of fee for no service practices, nonetheless argued for the retention of grandfathering on the basis that product trailing commissions were a declining factor and, in any case, trail commissions did not actually equate to an ongoing service fee.
What needs to be understood about the FPA’s stance on grandfathering is that it has more at stake than the loss of a few score members who remain heavily reliant on trailing commissions. The entire future and relevance of the FPA relies in large measure on it being approved by the Australian Securities and Investments Commission as a body monitoring the code of ethics, which is currently being developed by the Financial Adviser Standards and Ethics Authority.
As ASIC pointed out in its own submission to the Royal Commission, organisations such as the FPA have previously needed to be cautious in their handling of member sensibilities lest those members resign and head to competing planner bodies such as the AFA or Peter Johnston’s Association of Independently Owned Financial Planners. Becoming a code-monitoring body will irrevocably alter that dynamic.
Under the new legislative and regulatory framework put in place by the Government, every financial planner will be required to be a member of a code-monitoring body and the FPA, alongside the major accounting bodies and some professional services firms, is one of only a very few organisations which will have the finances and resources likely to be considered suitable by ASIC.
The AFA is also likely to be strongly considered as a code-monitoring body but, like the FPA, will need to prove that it has the financial and administrative capacity to deliver on such an undertaking.
The FPA clearly recognises that its long-term interests reside in moving beyond the findings of the Royal Commission and reaping the rewards of being a code-monitoring body.
However, this, in turn, means that if the FPA and AFA were appointed as code-monitoring bodies they would need to be prepared to police and enforce the code of ethics in a manner more proactive than that which has been perceived as being applied to former FPA member, Sam Henderson.
ASIC is proposing that the code-monitoring bodies achieve this by requiring that planners enter into legally-binding undertakings.
The ASIC consultation paper covering the expectations around code-monitoring bodies states:
We consider that monitoring bodies should carry out both proactive and reactive monitoring activities:
- proactive monitoring activities should be determined each year in a risk-based annual work plan and should comprise, at a minimum, one thematic ‘own-motion’ inquiry and one compliance statement process; and
- reactive monitoring activities should be carried out in accordance with defined processes for receiving and making an initial assessment of reports of potential failures to comply, investigating those reports, making a decision and, if necessary, determining any sanctions.
“We also consider that monitoring bodies should make the compliance scheme enforceable by entering into legally binding agreements with all covered financial advisers and should have processes for resolving disputes with those financial advisers,” the consultation paper said.
A key section of the consultation paper states that ASIC believes “it is crucial that a monitoring body ensures that financial advisers comply with its decisions and the requirements of the compliance”.
