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Bans on conflicted remuneration
The committee's inquiry into financial products and services in
Australia noted that the financial advice industry originated as a cohort of
sales staff representing financial product manufacturers. Advisers were
remunerated based on the value of products sold and their fee was deducted from
the amount paid by the consumer for the product. The origins of the industry,
however, do not align with contemporary consumer expectations that financial
advisers provide a professional service acting in the best interest of their
clients. In the current market, advisers typically play a dual role of
providing advice as well as acting as sales representatives for financial
Up-front commissions, charged as a percentage on the initial investment,
and trail commissions, charged at ongoing intervals as a percentage of assets,
are a common form of benefit provided to advisers. In some cases, advisers will
encourage consumers to gear their investment portfolios (use borrowed funds) to
enable the adviser to increase the benefit of asset-based fees.
This creates a clear conflict of interest between adviser and consumer and has
a negative impact on the quality of advice provided. In the collapse of Storm
Financial, for example, it was found that in some cases there was insufficient
consumer understanding of the risk of borrowing against the equity of a family
The Australian Securities and Investments Commission (ASIC) outlined
some of the features of commissions:
The distinguishing feature of commissions is that they are an
arrangement between the product issuer and the adviser or the adviser’s
licensee and they are built into the product. That is, the commissions are
incorporated into the fees paid by the client to acquire or hold the product.
After the investor has invested in the product, the investor cannot control the
Commissions as a ‘built in’ feature of products also distort
the cost of advice. Retail clients are unaware of the true cost of receiving
personal financial advice as this is often bundled into the overall fees they
pay for financial products.
Because the commission is built into the product, it is often
difficult to draw a link between the commission and the advice service
provided. For example, industry argues that trail commissions are in effect
payment for ongoing advice services provided to the client or ongoing
administrative costs, for example, the costs of monitoring the client’s
portfolio. However, trail commissions are often paid regardless of whether
there is any ongoing advice or service.
Conflicts of interests can also arise where advisers are authorised
representatives of a licensed advisory group owned by a product manufacturer,
creating a vertically integrated model.
Consumers are not necessarily aware of this relationship and of the inherent
conflicts of interest that will arise.
An additional element in the chain of commission-based payments is the
platform operator which can act as a conduit for various product providers to
licensees. A product manufacturer will pay a volume-based shelf-space fee, to the
platform operator to receive preferential treatment for their product when the
operator is interacting with licensees.
The fee amount paid by a product manufacturer is wholly, or partly, determined
by the total number or value of products listed with the platform operator.
The consumer, when offered and subsequently purchases a financial product, is
unlikely to be privy to the incentives offered to either the platform operator
or the adviser.
The bans on conflicted remuneration target the effect of these sales-incentives
on the quality of advice.
The second tranche of the FOFA Bills, the Corporations Amendment
(Further Future of Financial Advice Measures) Bill 2011 (the Bill) amends the Corporations
Act 2001 (the Act) to ban the payment and receipt of certain remuneration
which could influence the advice licensees provide to consumers in relation to
financial product advice.
Payments banned include:
- volume payments from platform operators to financial advice
- volume-based shelf-space fees paid by funds managers to platform
- asset-based fees on borrowed amounts; and
- soft dollar benefits over an amount prescribed by regulation
(proposed to be $300), as long as the benefits are not identical or similar and
provided on a frequent or regular basis.
The Explanatory Memorandum (EM) outlines that Australian Financial Services
Licensees (AFSLs) are remunerated differently from many other occupations and
that traditionally advisers have received commissions from product providers
for placing clients with particular products:
Product commissions may encourage advisers to sell products
rather than give unbiased advice that is focused on serving the interests of
the clients. Financial advisers have potentially competing objectives of
maximising revenue from product sales and providing professional advice that
serves the client’s interests.
There is some evidence that these conflicts affect the
quality of advice. The 2006 Shadow Shopping exercise of the Australian
Securities and Investments Commission (ASIC) found that advice that was clearly
or probably non compliant was around six times more common where the adviser
had an actual conflict of interest over remuneration. The conflict of interest
may lead to advice that is not compliant and not in the client’s interests.
Exceptions from conflicted
As noted in chapter 2, there are some exceptions to the bans on
conflicted remuneration including:
- general insurance;
- life insurance which is not bundled with a superannuation product;
- group life policies for members of a superannuation fund;
individual life policies which are not connected with a default
- execution-only (non-advice) services;
- non-monetary benefits in relation to general insurance;
- soft-dollar benefits under the amount prescribed by regulation
(proposed to be $300);
- soft-dollar benefits with an education or training purpose (to be
clarified in regulation);
- soft-dollar benefits that provide information technology software
- employees or agents of an Authorised Deposit-taking Institution
(ADI) that are providing advice on basic banking products.
Volume-based payments will also be excepted where it can be proven that
the benefit of the payment is not conflicted (see paragraph 5.24).
It is also proposed that regulations will address stockbroking
activities where a person receives third party 'commission' payments from
companies when the payments relate to capital raising be excluded from the bans
on conflicted remuneration (discussed further in chapter 7, paragraph 7.42).
The following matters are discussed in this chapter:
- Volume-based rebates;
- the impact on bank tellers;
- the impact on corporate superannuation;
- risk insurance inside superannuation;
- asset-based fees on borrowed amounts; and
There was broad support among industry participants for the ban on
conflicted remuneration and the government's policy goals of improving the
integrity and professionalism of the industry and increasing consumer
confidence in financial planners. There is, however, some disagreement on the
proposed conflicted remuneration provisions and the related carve-outs. These
views are discussed below.
The Australian Bankers' Association (ABA) noted that while the best
interests duty relates only to personal advice, the conflicted remuneration
provisions apply to benefits on personal advice, general advice and the
distribution of financial products.
The Superannuation Committee of the Law Council of Australia voiced
concerned that the definition of conflicted remuneration is 'defined in very
general terms' and is not limited to remuneration for personal advice:
Any fee or charge may be conflicted remuneration under the
general definition in section 963(1) if the licensee or its representative
provides financial product advice to a retail client which could have the
necessary influence. For example, a product issuer who provides general
financial product advice (for example in the form of a product disclosure
statement), could be prohibited by the ban on conflicted remuneration from receiving
a management fee as the fee could be interpreted as being capable of
influencing its general advice to investors. It could also prevent trustees of
superannuation funds paying fees based on assets under administration or the
number of members to fund administrators (who also provide general or personal
advice to members).
The Law Council has requested that product and service fees accumulated
as a result of general advice be specifically excluded from the definition of
conflicted remuneration in the forthcoming regulations.
The Financial Services Council (FSC) and the ABA noted that by
definition, general advice must be accompanied by a warning that the advice
does not consider the clients' individual personal circumstances, and the
client should consider their personal circumstances and the accompanying
disclosure documents before making a decision.
FSC submitted that general advice is:
- given in a far wider range of circumstances than personal advice and is
therefore likely to apply to a far wider range of situations than is necessary
- far less influential on the decision of a retail client than personal
- not the context in which the issues and concerns referred to in the
Explanatory Memorandum arise.
The ABA recommended that the bans on conflicted remuneration should not
apply to general advice; rather, it should encourage the use of scaled advice.
ABA asserted that general advice is an important element in filling the
financial advice gap for many Australians.
Further, the FSC highlighted that general advice is included in
broadcasts and media advertising, newsletters, websites, seminars, product
brochures (such as a product disclosure statement), call-centre operations and
billboards. In addition, it may not be product specific and has a broader
educational or informative purpose.
The FSC submitted that exemptions for general advice are required given
the low threshold for determining whether the benefit might influence advice.
ABA also suggested that regulations should prescribe an exemption for general
advice in relation to basic financial products, including simple super
products, simple wealth products, and retirement savings accounts.
The committee considers that the bans on conflicted remuneration should
apply to general advice and that advisers can utilise a fee-for-service model
when offering this form of advice.
Currently, employers can pay incentives to advisers to sell a certain
type or a certain volume of products. The Bill proposes to prohibit volume-based
shelf-space fees paid by funds managers to platform operators and volume
payments from platform operators to financial advice dealer groups.
One of the key concerns with the ban on volume-based remuneration was
the impact it would have on competition in the market, and the risk that dealer
groups would restructure their enterprises into vertically integrated models to
retain the income that they otherwise would have received from volume rebates. These
concerns, and the anti-avoidance provisions designed to address them, are
discussed further in chapter 6.
Volume-based fees as a fee for
service or scale efficiencies
A benefit is presumed not to be a volume-based shelf-space fee if it is
proved that all or part of the remuneration is a fee for service or a discount
that does not exceed the reasonable value of scale efficiencies:
The Bill assumes that the platform operator will be aware of
the nature of any discount or rebate it receives, and will therefore be aware
of whether a payment is a genuine fee for service, or represents genuine scale
efficiencies. It is therefore appropriate that the platform operator bear the
onus of proving that the payment ought to be presumed not to be a volume-based
Calls for greater restrictions
on platform fees
The Joint Accounting Bodies (JAB) believed there is a risk in allowing
volume-based shelf-space fees in instances where it is proven that all or part
of the remuneration is a fee for service or a discount that does not exceed the
reasonable value of scale efficiencies. JAB suggested that, alternatively,
platform operators should only be able to receive an asset management fee discount
in the form of a rebate where it represents a reasonable value of scale efficiencies.
JAB argued that the value of the rebate should be passed on to clients invested
in the respective fund manager.
The Joint Consumer Groups (JCG) argued that non-volume-based benefits
paid to secure preferential treatment on a platform should not be allowed:
Flat fee payments, especially if very large and bearing no
relation to the costs of the platform operator, could easily distort product recommendations
given to retail clients. For example, the payment of such a fee by a particular
product issuer may lead to increased recommendations to acquire the products of
that issuer, in much the same way that, in the past, high commissions have lead
to recommendations to acquire certain products.
JCG recommended that the ban should include 'any other benefit provided
by a product to a platform operator, other than:
- fees for services provided by the platform operator which
reasonably represent the market value of those services;
- the purchase price for property which reasonably represents the
market value of the property; and
genuine education or training benefits'.
Should the above amendment not be made, JCG recommended that the Bill
require ongoing, public disclosure of all payments by product providers to
platform operators on a publicly accessible website.
In his Second Reading Speech, the Minister for Financial Services and
Superannuation, the Hon. Bill Shorten MP, outlined that it would be in the interest
of advisers to act prudently when determining whether remuneration could be
considered to influence their advice:
If an adviser is confident that a particular stream of income
does not conflict advice, then these reforms do not prevent them from receiving
that income. For example, in the case of the receipt of income related to
volume of product sales or investible funds, there is a presumption that that
income would conflict advice. However, this is a presumption only, and if the
adviser can demonstrate that the receipt of the income does not conflict advice
then such remuneration will be permissible under the bill.
But the message is clear—if in doubt about whether certain
remuneration will conflict the advice that they provide to their client—the
adviser would be prudent to err on the side of caution.
Proving fee for service and
value of scale efficiencies
The Superannuation Committee of the Law Council of Australia was
concerned with the provision that certain benefits are conflicted remuneration
unless proven otherwise:
While the Committee agrees that not all volume based benefits
are conflicted remuneration, it has a real concern about how the section will
operate in practice. On what basis can it be proved that a volume based benefit
is not conflicted remuneration and to whom? Read literally, a volume based
benefit will be conflicted remuneration until such time as it is proved not to
be. In the Committee’s opinion, the provision does not give any certainty to
the industry or to employers.
The FSC believed the current drafting of subsection 964A(2), which
defines a volume-based shelf-space fee, does not permit genuine dollar-based
shelf-space fees charged by platform operators.
Further, Westpac is concerned that it will be an impossible task for a platform
to ascertain and prove the value of scale efficiencies of a fund manager:
...the way that section 964A(3)(b) is drafted, the onus is on
the platform to prove the efficiencies gained by the fund manager which is
difficult, if not impossible. Discounts and rebates will differ across the funds
management industry as each will have different economies of scale across
different asset classes. In addition, the fund manager’s economies of scale can
differ depending on the platform (e.g. services the platform takes on,
technology interfaces between the platform and fund manager). The discount is
also subject to confidential and commercial negotiations between the fund
manager and platform and may differ depending on the bargaining power of either
The Law Council recommended that a materiality threshold should be
included in the Bill, and a ruling system for ASIC to determine which benefits
are deemed conflicted remuneration and which are not.
Westpac also suggested that legislative guidance on how to prove that efficiencies
have been gained by the funds manager should be provided. It suggested a
reasonable option could be a bona fide arms length negotiated agreement between
the funds manager and the platform operator.
FSC recommended that subsection 964A(2) be amended to ensure annual or one-off
dollar based fees (not related to volume) that are operational in nature be
carved out from the definition of a volume-based shelf-space fees.
The EM outlines that, when determining a reasonable value of scale
efficiencies, regard should be given 'to what might be reasonable in all the
circumstances, including, for example, the relative bargaining power between
the particular funds manager and the platform operator'.
The committee acknowledges the calls from industry for greater certainty
in determining which volume-based fees will be permitted under the Bill. It
recommends that Treasury establish a materiality threshold in the regulations to
outline what percentage of a volume-based fee constitutes a genuine value of scale
efficiencies and what constitutes 'a reasonable fee for service'. Further, the
regulations should require product providers to publicly disclose permissible
volume-based payments made to platform operators on their websites, and
financial advisers should disclose volume-based benefits received in product
In addition, the committee recommends that ASIC issue guidance material
on how licensees can prove that efficiencies have been gained when in receipt
of a volume-based benefit. This may include written agreements between product
providers and platform operators which outline genuine value of scale
efficiencies, or a reasonable fee for service framed around requirements
specified in the regulations.
The committee recommends that regulations pertaining to paragraph
964A(3) of the Corporations Amendment (Further Future of Financial Advice
Measures) Bill 2011 be drafted to include a materiality threshold to
determine when a benefit is not presumed to be a volume-based shelf-space fee.
The regulations should specify that full disclosure is required for the payment
and receipt of these benefits.
5.38 The committee recommends that the Australian Securities and Investments
Commission (ASIC) issue guidance material for platform operators who seek to
substantiate a claim that a volume-based payment demonstrates a reasonable fee
for service or a genuine value of scale efficiencies.
Impact on bonuses for bank tellers
ABA submitted that the ban on volume-based fees could be interpreted to
prohibit the payment of performance bonuses for bank staff, as performance
bonuses relate to volume, or in some cases, an aggregate net improvement in
their client's net position:
The ABA submits that performance pay for bank employees is
beyond the policy intent of the FOFA reforms. Furthermore, it does not
automatically follow that a client is at risk of receiving advice which is
conflicted merely because an adviser may receive part of their remuneration in
the form of a performance bonus payment from their employer based on their
overall activities for the year and the overall service provided to retail
ABA submitted that the structure of performance-based remuneration can
be designed to foster productivity, innovation and efficiency, industry
competiveness and global competiveness.
In addition, banks use a balanced scorecard approach which uses both financial
and non-financial measures to determine incentive eligibility:
Incentive plans or variable rewards schemes can be based on a
balanced scorecard approach where performance outcomes and behaviours are
measured, such as customer satisfaction and quality (based on proxies used to
ensure product sales meet customer needs and the product is used), community
engagement, culture and employee management, self-development, financial and
risk management, strategic process and quality, and revenue (based on
individual or overall team performance). Measures are both financial and
nonfinancial. The actual percentage of a scorecard relatable to a revenue
measure varies from bank to bank, function to function, and individual to
ABA believed that bonus arrangements for bank staff should not be considered
conflicted remuneration where incentive plans are not specifically volume-based,
or 'wholly and directly linked to specific sales targets of a class of
products, or where individual sales volume does not solely determine the
ABA recommended that the Bill should be amended to exempt volume-based payments
that are not 'wholly or directly' (rather than 'wholly or partly') related to
the value or number of financial products and argued that:
In the absence of amendment and clarification, this could
result in all bank staff not being rewarded and the removal of certain
discretionary incentive structures, including performance bonus payments based
on balanced scorecard methodology.
ANZ noted that the EM 'appears to recognise the balanced scorecard
approach as an acceptable remuneration arrangement':
If an employees is remunerated based on a range of
performance criteria, one of which is the volume of financial product(s)
recommended, the part of the remuneration that is linked to the volume is
presumed to be conflicted. However, if it can be proved that, in the
circumstances, the remuneration could not reasonably be expected to influence
the choice of the financial product recommended, or the financial product
advice given, to retail clients (section 963A), the remuneration is not
conflicted and is not banned.
The committee believes that the carve-out from the conflicted
remuneration bans for Authorised Deposit-taking Institutions (ADIs) providing
advice on basic banking products is sufficient to allow for current
performance-based remuneration structures in ADIs to continue.
Impact on corporate superannuation
Another group claiming they will be adversely, and unintentionally,
affected by the ban on volume-based fees are the corporate superannuation
specialists. This group engage in contracts with employers, providing
newsletters and offer seminars in the workplace to educate employees.
Less than 10 per cent of corporate super specialist firms receive remuneration
directly from their employer, the remainder receive income from the fund
The Corporate Superannuation Specialist Alliance (CSSA) outlined that employers
prefer the current form of remuneration for corporate super specialists and do
not want an additional expense on top of their super contributions.
The Boutique Financial Planning Principals Group (BFPPG) detailed its
experience with several thousand members of corporate super funds totalling
more than $100 million and an average member balance of $30,000. The BFPPG commented
that 'the most efficient, cost effective way of being remunerated is through
platform fees'. The BFPPG argued that without the services of corporate super
specialists, the responsibility will fall back on the trustee who will have to
increase administration fees to provide cover for their members, and as a
result there will be no cost saving for consumers.
The BFPPG also raised concerns that the measure will remove corporate
superannuation specialists' services from the market and argued that this 'goes
directly against government's stated aim of promoting choice and enabling
access to quality advice at a low cost':
Removing that ability to be remunerated will result in an
inability to service clients, members will be predominantly invested in the
fund’s default option, with little or no understanding of their super, little
or no opportunity to salary sacrifice, unaware of co-contributions or
transition to retirement strategies and with no inclination or interest in
investing more into their super since there will be no one to advise them.
The CSSA is made up of over 50 firms.
It was formed in response to the proposed reforms in the sector and concern
that corporate superannuation specialists would unintentionally be caught by
restrictions intended for financial planners. CSSA was also concerned that the
proposed reforms will jeopardise the viability of the services they offer:
One reason the fees are so low in this sector of the
superannuation industry is that we have negotiated on behalf of our clients to
reduce the fee they pay. We also negotiate lower insurance premiums and higher
levels of the automatic insurance cover which people get. This assists many
people to get insurance cover which they may not otherwise be eligible for. We
provide proactive financial education, advocacy and services delivered to the
workplace. We believe the services we are providing fit perfectly with the
government's goal to assist more people to seek financial advice, to be
financially independent and to reduce dependence on social security, therefore
creating less of a burden for future generations of taxpayers. Why then does
the proposed legislation not provide a method for us to be paid for our
valuable services? Why must we be forced into extinction?
CSSA went on to state that if payments are channelled into an
administration fee paid by a fund, rather than an ongoing commission, the fee
for service will be hidden in the costs of the intra-fund advice
of fund managers:
The only possible option is to revert to what ultimately
looks like another form of commission and that is for us to be paid by the
super fund trustees as part of the totally untransparent intrafund advice fee.
We believe that any fee paid to us should be explicit and transparent and
should be agreed between the party providing the service, being us, and the
party receiving the service, being our clients.
CSSA argued that its member firms provide a service that cannot be
compared to the education, or general advice, services provided by fund
managers that are in a vertically integrated model. It argued that if consumers
are forced to deal directly with product providers, they will find it much more
difficult to receive unbiased advice, particularly in the case when they opt to
pay an additional fee for personal advice. In this case it would be 'unlikely
that, for example, an AMP employee will recommend a product from MLC'.
The committee considers that corporate superannuation specialist firms
promote choice in the market and these valuable services should continue to be
provided. The committee emphasises that employers may choose the form of
remuneration most suitable to their circumstances following the reforms.
The committee believes that corporate superannuation specialist firms should
continue to receive benefits where they represent a 'reasonable fee for
service' or a value of scale efficiencies.
The committee proposes that Treasury conduct further consultation with
the corporate superannuation specialists firms to discuss alternative viable
models of remuneration that align with the FOFA reforms.
Risk insurance inside superannuation
Remuneration for general insurance and life insurance products outside
superannuation are allowed under the provisions of the Bill. However, the
following forms of remuneration are considered conflicted:
- group-life insurance bundled with superannuation; and
- life insurance bundled with default superannuation.
The National Insurance Brokers Association of Australia (NIBA) stated
that the focus of the reforms has been financial planning and wealth
management, not risk insurance. As a result the 'risk insurance industry has
not had the opportunity of a review similar to that undertaken in relation
to...the financial advisory industry'.
NIBA highlighted that no evidence has been provided to warrant significant
reforms to the risk insurance industry:
A recent industry review by ASIC found no such problems and
the regime (effectively Chapter 7 of the Corporations Act and general law) is
working well for insurance brokers and their retail clients. In particular,
this is evidenced by the low level of disputes referred to the Financial
Ombudsman Service (FOS) in relation to insurance brokers. Insurance brokers are
effectively being tarred by the same brush as financial advisers for no good
NIBA also emphasised that insurance products can be complex and
difficult to understand, and that the services of a professional adviser can
assist consumers to get the coverage they need at an appropriate price, and in
turn reduce claims issues.
Increased levels of
Some submitters argued that bans on life insurance inside superannuation
will increase levels of underinsurance in Australia.
IOOF Holdings commented:
A vast majority of the population settle for the default
insurance cover provided within their default super fund and are, consequently,
under-insured. Those that do seek advice obtain appropriate levels of cover
most typically through group life insurance arrangements. The ability to pay
commissions from inside super rather than having to pay from after-tax salary
is a primary reason for those who do accept to be advised on risk insurance.
The removal of risk insurance commissions inside super will exacerbate the
existing under insurance situation in Australia.
Fee for service with adviser-driven insurance presents
practical challenges. Imagine a situation where an adviser must do significant
work, and so charge the client at the time a claim is lodged following the
death or injury of the client’s partner.
The Association of Financial Advisers (AFA) put the view that risk
insurance inside superannuation should remain outside the FOFA remuneration
changes on the grounds that is has a similar set up to general insurance type
products (which are exempt from the bans), it has an annual renewal period and
a defined benefit/risk.
Accordingly, the AFA recommended:
...that this area be the subject of greater research and
investigation. In the context of corporate superannuation and group life
insurance, there needs to be a comprehensive review of the current model across
retail, corporate and industry fund superannuation plans. Consideration needs
to be given to a sensible alternative remuneration model for insurance
arrangements, where advice is provided.
The committee believes a fee for service model is appropriate when
advice is provided for risk insurance products bundled with superannuation
products. For example, in the case where a client is required to pay a fee for
service after lodging a claim for the death or injury of a partner, the Bill
allows for the fee for service to 'be given directly by the retail client or is
given by another party at the direction, or with the clear consent, of the retail
Namely, the client can direct that the fee for service be taken from the
client's investment, or product issuer in the case where they do not choose to
pay the fee directly.
Remuneration on all risk
insurance products should be banned
The Industry Super Network (ISN) argued, however, that commission on all
personal risk products should be included in the ban, including those outside
JAB agreed and argued that the carve-out for insurance outside superannuation 'encourages
the retention of conflicted remuneration models':
We believe the inconsistency in how commissions on insurance
for life risk products sold outside of superannuation and individual life risk
policies within superannuation for non-default funds adds unnecessary
complexity. Further, it encourages the retention of conflicted remuneration
models. All payments deemed to be conflicted remuneration should be regulated
Choosing to not ban conflicted remuneration on life risk
insurance products in these specific circumstances, irrespective of the best
interests obligation, risks the continued provision, perceived or real, of
inappropriate advice to consumers who seek advice on these products.
The Joint Accounting Bodies do not believe there are
sufficient grounds to warrant these products being excluded from the regulation
proposed to apply to other like products. Such ‘carve-outs’ add complexity and
cost to the provision and administration of advice, which will ultimately be
passed on to the consumer.
JCG believed allowing a carve-out for life risk insurance commissions
outside superannuation may exacerbate the 'mis-selling and churning' of life
risk insurance 'especially as, after the commencement of the Bill, life risk
insurance will be the product that is most likely to provide financial advisers
with commission income'.
Treasury told the committee that 'the risk of possible reductions in
insurance advice is one of the main reasons why the government decided not to
ban all insurance commissions'.
The committee believes that the bans on commissions for insurance inside
superannuation provide important consumer protections.
The committee is mindful of the prediction that life-risk insurance will
be the product most likely to provide advisers with commissions. It therefore recommends
that ASIC conduct shadow shopping exercises post-implementation of the Bill to
monitor whether conflicted advice is being provided on risk insurance outside
The committee recommends that the Australian Securities and Investments
Commission (ASIC) conduct shadow shopping exercises on advice pertaining to
life risk insurance outside superannuation post implementation of the Corporations
Amendment (Further Future of Financial Advice Measures) Bill 2011. ASIC
should report its findings back to this committee within two years of the date
the Bill commences.
Remuneration for group life
insurance inside superannuation
Group life insurance is commonly understood as a structural arrangement
where insurance is purchased from a life company by a trustee of a
superannuation fund on behalf of a group or class of members to provide
administrative and cost benefits for trustees and their members.
A number of submitters argued that remuneration for the sale of group
life policies within superannuation should be allowed on the basis that
tailored advice is provided in these instances.
CSSA argued that group life insurance 'is not unadvised insurance, as has been
The table below compares the features of insurance inside and outside
superannuation. It highlights that insurance offerings in superannuation
provide administrative efficiencies for superannuation funds and allows members
to access group premium rates. It also offers the flexibility of Successor Fund
Table 6.1: Comparison of the features of insurance inside
and outside super
Source: Financial Services Council, Submission
58, p. 57.
The Financial Planning Association (FPA) suggested that commissions on
group life insurance should be allowed in the following instances:
if a client actively seeks personal advice which results in the
purchase of a group life insurance policy inside superannuation in order to access
the advantage of the group life policy rate as an individual; and
if a client seeks personal financial advice to review and top up
their insurance needs where it relates to a group life insurance arrangement
inside superannuation (the commission should only be payable on the increase of
life insurance cover and not from all members of the group-life arrangement).
Westpac agreed that 'group life policy' should be amended to only
capture situations where the product provides a pre-determined level of cover
to the client (without tailored advice) and suggested an additional amendment
...in order to obtain insurance cover, the member must make a
separate application for coverage under the product, including choosing the
benefits and levels of cover.
CSSA suggested an alternative remuneration model should the proposed ban
on group insurance within superannuation proceed. CSSA further proposed that
when insurance services are provided to an employer group, that a fee can be
charged to all members at an agreed percentage as negotiated with the client.
Without this agreement in place, the default fee should be set to zero, to
protect against firms charging a default commission even when advice is not
As well as highlighting that tailored advice can be provided for group
life insurance inside superannuation, IOOF Holdings argued that the Bill
creates distortions between advice that is provided inside and outside
We submit that it is inequitable to permit charging of
commissions on individual life risk policies within super while disallowing it
for group life risk policies, even though the clients in both instances have
obtained advice in relation to their insurance requirements. Equally it is
inequitable between clients within the superannuation and non superannuation
environments where a financial adviser is managing clients’ investments holistically.
We would further submit that it should be acceptable for level commission to be
payable to financial advisers on group life policies as this in fact eliminates
The AFA also argued that the Bill will create two different playing
...we are facing a world where there are two different
playing fields. If you are an individual, you can get advice and the adviser can
get paid a commission inside and outside super. You can do the same for large
group plans outside super, but not inside super. So what you end up with is a
playing field that really has different rules and, in our view, will distort
the advice outcomes as consumers look for the best outcome and obviously work
with the advisers that look after them. The simple way to think about it is to
take the view that, where advice is provided, commissions are allowable whether
they are inside super or outside super; where no advice is provided, clearly
there should not be any payment. But to create an artificial piece around the
way advice is provided makes no sense at all. In fact, for those advisers who
are specialists in the small business superannuation environment, it is a
significant threat to their future and to their business.
The committee discussed the potential for regulatory arbitrage is
relation to group life insurance with the Association of Superannuation Funds
of Australia. It noted that 'wherever you have regulatory arbitrage it will
drive behaviours'. Further:
What those behaviours are I do not think we can foresee but
certainly any regulatory arbitrage is, I think, always something to be avoided
in any legislation and in any policy.
In relation to risk insurance within superannuation, the Association
The issue that has been raised with us is this: the
government's policy is very much when you receive individual advice about your
individual cover and it is a stand-alone cover, so you are not part of an
employer group, then commission should be able to be paid because you have got
an engaged managed relationship with that adviser. Because of the nature of
superannuation funds and because of the nature of the trust structure, the
trustee buys the wholesale group policy. Where you have individual persons who
are not part of employers but who are individuals putting their insurance under
the fund because of tax purposes or efficiency purposes, they have individual
cover, individual advice and are individually remunerated to the adviser. But
because it is under a wholesale group policy they are still caught.
Treasury outlined that the banning of commissions inside superannuation
is consistent with the recommendation of the Super System Review (the Cooper
Review) as these commissions have the potential to affect the quality of
advice. It also noted that ASIC shadow shopping surveys have indicated that in
cases of poor advice, over half involved poor life insurance advice.
Treasury informed the committee, however, that the government is still
considering whether group life insurance should be treated in the same manner
as individual risk insurance policies. Treasury commented that:
It is not individually-advised versus group; it is
individually-written policies versus group policies.
The argument that has been put to government is that there is
some individually-advised insurance within a group policy context and that that
should be treated in the same way as individual policies.
However, Treasury indicated that the government has yet to come to a
conclusive view and the matter is still under discussion.
The committee does not accept a blanket statement that personal advice
is provided to members on all group life insurance offerings. However, it does
recognise that there are instances where tailored advice is provided on group
life insurance and therefore it may be inequitable to allow for benefits to be
paid on risk insurance outside superannuation. This may create market
distortions and affect the quality of advice provided to consumers. One
possible outcome, for example, is that it could deter advisers from offering
group life insurance (which may have a discounted wholesale rate) over offering
risk insurance outside superannuation where they will receive a commission. The
committee considers this would be a poor outcome.
5.80 The committee recommends that post-implementation, Treasury work with
the Australian Securities and Investments Commission (ASIC) to monitor closely the
quality of advice on the sale of risk insurance inside and outside
superannuation and any market distortions that may occur.
Asset-based fees on borrowed amounts
The Bill establishes a ban on asset-based fees (a fee calculated as a
percentage of a client's funds under advice) on borrowed amounts.
A 'borrowed amount' refers to an amount borrowed in any form, secured or
unsecured. An exemption is provided if it is not reasonably apparent to the
licensee or adviser that the monies used by a retail client are borrowed. The
EM states that the test for 'whether something is "reasonably
apparent" is an objective one, based on whether it would be apparent to a
person with a reasonable level of expertise in the subject matter of the
advice, exercising care and assessing the client's information objectively'.
The Bill will establish such an offence, as subject to maximum civil penalties
of $200,000 for an individual or $1,000,000 for a body corporate. Treasury commented
that the rationale for the measure:
...is to prevent advisers from artificially inflating their
advice fee by recommending a client borrow additional funds (inappropriate borrowing
strategies were a key concern arising out of the collapse of Storm Financial).
The FPA submitted that asset-based fees should not be considered
conflicted remuneration where they act against a client's interest as it is a
form of 'calculating' remuneration:
...to equate "asset based fees" with "conflicted
remuneration" shows a profound (or potentially deliberate)
misunderstanding of the fact that ‘asset based fees' are not a form of
remuneration at all, but very simply a form of 'calculating' remuneration. When
coupled with the professional expectations that require client directed payment
and prohibit product or strategy bias that act against a client’s interest, it
is clear that this form of calculation does not create conflict at all.
The issue that should be debated is not which calculation
model is permissible for borrowed amounts, but whether the remuneration in the
financial planning profession is respondent to professional expectations of practice,
transparency and comparability and more than anything else, aligned to
professional expectations of a service that delivers value.
The FPA suggested that the ban on asset-based fees on geared funds
should be removed as it is 'disingenuous to the benefit that a statutory best
interest duty obligation will provide' and that the best interest duty 'will
assist in driving the behavioural change needed to address this issue'.
Burrell Stockbroking and Superannuation (BSS) also suggested that the 'best
interest duty' is sufficient to protect consumers in relation to gearing:
In order to manage risk, clients who use borrowed funds for
investment purposes need a higher level of advice than clients who invest their
own funds. We advise clients who borrow funds for investment to operate a low
risk strategy, such as investing only in blue chip stocks. Removing the ability
to charge asset-based fees on borrowed funds will diminish the level of advice
provided to clients who borrow. It is essential that clients who borrow
continue to access professional advice to manage their risk. The Bill should
reconsider the ban on charging asset-based fees on borrowed funds.
Placing a ban on asset-based fees on borrowed funds is not
the way to stop over gearing, the like of which lead to the Storm Financial
collapse. If an adviser has correctly and diligently obtained a client’s
information and objectives, then appropriate advice would mean a client is not
over geared... It is our opinion that the 'best interest duty' would be
sufficient to ensure gearing is controlled.
FPA suggested that the following circumstances should be explicitly
excluded from the bans on asset-based fees:
- where the financial planner is not responsible for, and has not
recommended, the client borrow to invest (the gearing). For example, the client
already has geared funds and requests an investment strategy from the financial
- an existing client has a geared portfolio prior to the
commencement of the Bill, and 'tops up' the gearing for further investment
opportunities following the commencement of the Bill.
Mr Russel Tym, a submitter to the inquiry, suggested that the measure
will deter clients from using borrowing strategies as the ban will force
advisers to move to alternate remuneration structures, and charge large initial
fees to assist consumers to set up their savings plans.
Treasury argued that the measure allows advisers to recommend a
borrowing strategy if it is in a client's best interest and that advisers are
able to use alternative remuneration methods in these instances:
The measure does not prevent advisers from recommending
borrowing strategies to clients, especially if such a strategy is in a client’s
best interests. However, the adviser would need to find an alternative method
to charge for advice on the borrowed component. For example, the adviser could
charge an hourly rate or a flat fee which is not percentage-based.
ISN supported the provision, and opposed the deduction of any form of asset-based
or ongoing fees. It suggested that permitting them 'enables the industry to
replicate all the ill-effects of commissions'.
The JCG agreed and suggested that the restrictions on asset-based fees should
particularly as the EM outlines that asset-based fees are likely to become more
prevalent after implementation of the Bill.
The JCG also asserted that asset-based fees mimic the features of commission
Firstly, they create conflicts of interests or incentives
that may encourage the adviser to give poor quality advice. They bias advice away
from strategic advice, such as personal debt reduction, towards recommendations
to acquire products from which an adviser can extract an asset-based fee. They
do not provide an incentive to provide ongoing services to the client because
the financial adviser is paid regardless of the services provided. Secondly,
they are frequently not transparent to clients as they often involve the
payment of fees out of funds under the control of the adviser, without any direct
involvement by the client...Finally, asset-based fees bear no relationship to
the work actually done by the financial adviser...
These inherent flaws in asset-based fees often lead to
excessive fees for financial advice. Research conducted by Rice Warner
Actuaries in May 2011 indicates that the cost of advice provided by an adviser
who uses a commission or asset-based fee remuneration model is 3 to 18 times
the cost of similar advice provided by an adviser who uses a fee-for-service
remuneration model. The higher fees paid by clients whose advisers use a commission
or asset-based fee remuneration model will obviously erode the wealth of these
Burden of proof that money is
Westpac commented that the burden of proof under the 'reasonably
apparent' that money is not borrowed test would be costly and onerous for both the
product provider and the customer:
Given that many customers set up instructions when they first
invest, and often make additional investments electronically (e.g. BPAY or
direct debit), ascertaining each and every time if the investment is from
borrowed funds is near impossible and very inefficient.
Westpac suggested the inclusion of a specific exemption for product
providers that are simply facilitating the payment of adviser fees through the
The committee notes that under the FOFA reforms, consumers can continue
to use borrowing strategies where it is in their best interest: in this case,
the adviser can charge a fee for service.
The Bill has provisions on the application of the ban on conflicted
remuneration where benefits 'given under an arrangement entered into before the
day on which that item commences' do not apply.
Minister Shorten announced in August 2011 that:
The ban on conflicted remuneration (including the ban on
commissions) will not apply to existing contractual rights of an adviser to
receive ongoing product commissions.
This means that, in relation to trail commissions on
individual products or accounts, any existing contract where the adviser has a
right to receive a trail commission will continue after 1 July 2012, or in the
case of certain risk insurance policies in superannuation, 1 July 2013.
The grandfathering provision (or 'application of ban on conflicted
remuneration' as stated in the Bill) is conditional on:
benefit is given under an arrangement entered into before the day on which that
item commences; and
benefit is not given by a platform operator.
The AFA and the FSC argued, however, that what is proposed and what has
been delivered are different.
The ABA argued the case for clear grandfathering provisions to be included in
Firstly, banks and other financial service providers have
varying employment and workplace arrangements as well as contracts and service
agreements. In the absence of clear grandfathering arrangements, it is
uncertain whether the Government is able to intervene in these arrangements,
contracts and agreements legally or whether banks and other financial service
providers are able to cease or alter these arrangements unilaterally or within
imposed timeframes. We note that some arrangements have years to run before they
expire or are due to be renegotiated...
Secondly, the issue of 'crystallisation' must be taken into
account during the drafting of the grandfathering provisions. This issue was
noted in Minister Shorten's announcement, which indicated that the ban on
conflicted remuneration would prohibit future payments to, for example,
licensees/representatives in respect of new investments through a platform but
will grandfather payments to licensees/representatives in respect of
investments in a platform accumulated prior to 1 July 2012. This means the
level of volume payments from platform providers to dealer groups will
'crystallise' and result in the need for major reconfigurations to support
crystallisation of overrides, such as trail commissions, as at the commencement
The FSC noted that paragraph 1528(1)(b), which details the ban on
conflicted remuneration, does not apply where 'the benefit is not given by a
platform operator'. It argued that this 'amounts to a retrospective ban on
conflicted remuneration paid by platforms' and 'is inconsistent with all
previous policy announcements on this matter':
The FSC recommends that s1528(1)(b) of Bill 2 be deleted to
enable existing contractual arrangements to be grandfathered. The FSC also
recommends that the Bill be amended to enable grandfathered benefits to also be
accepted by a financial services licensee, authorised representative or representative
of a financial services licensee.
Treasury commented that the FOFA reforms 'will have a substantial impact
on industry and the grandfathering of existing contracts will mean that the
changes will apply on a more gradual basis'.
The committee has requested a response from Treasury as to why section 1528(1)(b)
has been included where grandfathering is not given when 'the benefit is not
given by a platform operator'. The committee asked Treasury to comment on this
issue in light of arguments that this does not align with the government's policy
intention. Although the committee had not received a response before finalising
its report, it is important that Treasury does explain this issue on the public
Technical amendments and 'drafting anomalies'
The committee notes that a number of industry members raised concerns
that the Bills contain drafting anomalies relating to conflicted remuneration
issues and have recommended drafting amendments for the Bill.
Mr Jim Murphy, Executive Director of the Markets Group of Treasury has
highlighted the difficulties of providing industry with concrete certainty in
regulatory material during major reforms:
In relation to the views expressed here by industry yesterday—I
know these people personally, I have worked with them for a long time, and I
have a very high regard for the representatives of some of these industry
organisations and for some of the major institutions—these are challenging
reforms for industry, and industry of course, where they have businesses to
run, will look for concrete certainty in legislation and explanatory material.
I suggest to the committee that it is very difficult or probably not possible
to give concrete certainty as to how things will work out in terms of
legislation. What we have to do is to provide as much guidance and explanation
as possible to the industry through the bill, the explanatory material and
ASIC's explanatory notes.
In addition, the uncertainty of industry members in relation to
conflicted remuneration was acknowledged by a Bills Digest released by the
Parliamentary Library. The committee agrees with the commentary in the Bills
Digest that ASIC has an important role to play in clarifying issues and allaying
The committee notes that the Bills represent major reform of the
financial services sector and perhaps the most significant reforms in the last
As with any major reform, there will be some uncertainty for stakeholders in
the way in which legislation will be interpreted and how industry participants
should apply the new laws. With this in mind, Treasury and ASIC should ensure
that any uncertainty is addressed and further clarity be provided wherever
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