Financial advice recommendations from the Royal Commission – a snapshot
May 8, 2021
Trailing commissions: The Future of Financial Advice laws banned upfront and trailing commissions but a concession allowed pre-2013 arrangements to continue; they were ‘grandfathered’. This signals the end date for grandfathered commissions, but their phasing out has already begun with each of the major banks having already announced steps to reduce or eliminate them. This is likely to further depress valuations of practices across the financial planning industry.
Insurance commissions: Until last year, commissions on life risk insurance products were also exempt from the ban on conflicted remuneration. This meant life insurance companies could pay financial upfront and trailing commissions to encourage the advisers to recommend their product. These types of commissions have been capped, but Commissioner Hayne believes they should be removed entirely as soon as possible. We expect there will be a considerable push to do so.
Ongoing advice fees: These will need to be reauthorised every year rather than biannually, and customers must give written authority before the deduction of ongoing fees from their accounts is authorised. It will take some time to assess the cost of the annual reviews of ongoing service fees. Advisers must record in writing each year the services the client will be entitled to receive and the total of the fees to be charged. They cannot permit or require payment of fees from any account held for or on behalf of the client except on the client’s express written authority.
Prohibiting of advice fees on MySuper accounts: There will be a prohibition on deducting any advice fee (other than for intra-fund advice) from a MySuper account. Watch to see how the Government reconciles this idea with recent recommendations in the Productivity Commission’s report on superannuation, in particular the proposal to fundamentally redesign the selection of default superannuation funds in Australia.
Improving the professionalism of financial advice sector: The core recommendations in relation to improving professionalism includes financial advisers individually registering to a new disciplinary body and mandatory reporting of compliance concerns. Financial advisers will need to be individually registered. A single disciplinary body would be responsible for imposing sanctions for misconduct, with the most severe punishment being deregistration. The exact shape of this body remains to be seen but it would seem that it will not be left to the existing ASIC banning order powers.
Along with reporting misconduct to the new disciplinary body, AFSL holders will be required to report serious compliance concerns about individual financial advisers to ASIC as a condition of their licence.
All AFSL holders should be required, as a condition of their licence, to give effect to reference checking and information-sharing protocols for financial advisers, to the same effect as now provided by the ABA in its ‘Financial Advice – Recruitment and Termination Reference Checking and Information Sharing Protocol’.
Managing conflicts of interest: If a financial adviser wishes to use the words, ‘independent’, ‘impartial’ and ‘unbiased’ but cannot meet the requirements to be classified as independent’, ‘impartial’ and ‘unbiased’, they must advise their clients of that fact before providing any financial advice.
Commissioner Hayne has recommended an amendment to the Corporations Act which, in effect, mandates non-independent advice to be outlined in a written statement to clients.
In three years’ time, there should be a review by Government in consultation with ASIC of the effectiveness of measures that have been implemented by the Government, regulators, and financial services entities to improve the quality of financial advice. The review should preferably be completed by 30 June 2022, but no later than 31 December 2022.
Further, he has recommended financial planners to take extra steps to ensure they act in the best interests of their clients.
None of this is surprising and indeed was likely to be the subject of enhanced scrutiny from ASIC since their 2018 Review showed 75% of advice did not demonstrate compliance with the ‘best interest’ duty and related obligations and 10% required client compensation. ASIC said that this is a clear example of a “conflict of interest between the advice licensee’s interest in selling its in-house products and the customer’s interest in receiving advice that is in their best interests”.
Prohibition on the unsolicited offer or sale of superannuation products: Unsolicited offers or sales of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme. This recommendation is set to have a significant impact on the superannuation industry and will switch the debate away from the current difficulties the industry faces in distinguishing between general advice and personal advice, and in turn, the way superannuation products are marketed to consumers.
Skills: Commissioner Hayne considers enhanced education and training essential to the elevation of financial planning to a profession. It’s worth remembering that this will be in addition to the new Financial Adviser Standards and Ethics Authority regime that is already imposing further costs on the industry.
Nominating default funds: There is currently significant confusion and duplication in this area, with many Australians having multiple accounts from different employers. A single, default superannuation account for each person (created for new workers, or workers without a superannuation account). This recommendation addresses the erosion of multiple accounts through secretive and unknown account fees, particularly for young and part-time workers.