10 minutes on... post FOFA rewards

Transcription

1 September 2012 What you need to know about emerging topics essential to your business. 10 minutes on... post FOFA rewards Brought to you by PwC.

2 Highlights With the FOFA deadline looming and ASIC regulatory guidance outstanding, there is continued uncertainty facing the financial planning industry Perhaps the only certainty is that waiting for final guidance will be too late it will not leave sufficient time to properly prepare for the reforms. There is much that Australian firms can and should already be doing to prepare including learning from experience overseas where similar reforms are being implemented FOFA is driving companies to ask some challenging questions of their corporate strategy and business model. Despite the demands of compliance, opportunities for differentiation are available for businesses who are prepared for the changes and who are taking steps to align their business models, product, channel and people strategies to the realities of a post-fofa landscape The Government announced the Future of Financial Advice (FOFA) reforms in April 2010, with the primary aim of improving the quality of, and access to, financial advice for Australian consumers. The impact of FOFA extends beyond the provision of advice to have a number of impacts along the value chain (including fund managers, platforms, licensees and financial advisers) driving companies to ask some challenging questions of their corporate strategy and business model. The first tranche of the FOFA legislation was passed by parliament on 25 June These reforms A range of benefits are likely to be banned by FOFA: Reward type Upfront and trailing product commissions Volume based benefits Soft dollar benefits (e.g. conferences, buyer of last resort arrangements, allowances, support services) Volume-based shelf-space fees Asset-based fees on borrowed amounts Commissions on risk insurance within MySuper Commissions on group risk insurance within all super commenced on 1 July 2012, will be mandatory from 1 July 2013 and broadly: Provide a statutory duty for financial advisers to act in the best interests of their clients Introduce an opt-in obligation requiring advisers to renew their clients agreement to ongoing fees every two years Ban conflicted remuneration this has implications on a range of employee benefits Ban certain other types of remuneration (e.g. asset-based fees on borrowed amounts) Commencement date & exclusions 1 July 2013 (subject to the grandfathering provisions) Certain exclusions apply (e.g. basic banking products, general insurance, life risk insurance outside super, wholesale clients, execution-only services, prescribed benefits) 1 July 2013 (some exclusions & subject to the grandfathering provisions) 1 July 2013 (some exclusions subject to the grandfathering provisions) 1 July 2013 (this is expected to be prescribed in the regulations)

3 FOFA myths exposed! A number of FOFA misconceptions or myths have been perpetuated. 1 FOFA is not an issue for us because we moved to a fee for service model some time ago 2 Volume based benefits or asset based fees are all banned under FOFA 3 Conflicted remuneration is not just about commissions, any remuneration arrangements with a product element, or a platform or advice influencing element will need to be assessed against the very broad conflicted remuneration and banned remuneration tests Our experience is that there are plenty which are not immediately apparent Commissions are dead Commissions on certain products (such as risk outside of superannuation and basic banking products) are not impacted by the FOFA measures Grandfathering is available for trailing commissions on products sold before FOFA comes into effect and (subject to ASIC guidance) should be able to remain in place indefinitely (unlike products and arrangements entered into after that time) Aside from FOFA most remuneration designs have been removing commissions from adviser remuneration for some time either by dialling the commission down or rebating the value to customers 4 Not all volume based benefits (including asset based) will be conflicted remuneration There are many examples where it should be possible to prove that the fee or adviser remuneration mechanism does not influence financial product recommendations or advice (and therefore would not be conflicted remuneration) We are observing companies refining their incentives and pricing frameworks to preserve these types of arrangements as far as possible, with the intention to continue to reward such benefits post FOFA An incentive plan based on a balanced scorecard approach is the only acceptable solution post FOFA There is a growing trend across the industry to adopt a more balanced performance assessment We support this trend as we believe that incentive plans are most effective when the are aligned and driving the business strategy While a classic balanced scorecard approach is one way to achieve this alignment, there are a number of alternatives available which we believe are FOFA compliant

4 FOFA myths exposed! An incentive plan with a significant weighting on 5 financial metrics will not be appropriate post FOFA 6 We believe that it is the drivers behind the financial metric rather than the metric itself that will cause it to be conflicted remuneration Hence it is our point of view that incentive plans with a significant weighting on financial outcomes are still possible where the construct includes elements to mitigate any potential conflicts We are observing a refinement of financial metrics (e.g. revenue, cash flow) to allow for financial advisers to still be rewarded on financial outcomes while removing the influence from the benefit, and in particular any conflicted sources of revenue FOFA does not impact our advisers because they only deal with sophisticated investor(s) Whilst the revised definition of a sophisticated investor is still outstanding, the current definition deems some advice to sophisticated investors and high net worth individuals to be advice to a retail client (for example all advice regarding self managed super funds) and therefore within scope Our experience is that care needs to be taken in reviewing and determining appropriate reward strategies for all groups of financial advisers to ensure FOFA compliance 7 FOFA is not an issue for us because: we are not financial advisers, but are business bankers, investment brokers, fund managers and retail bankers, or not all of us are financial advisers, some of us are managers, sales staff and office staff Conflicted remuneration provisions are very broad in scope and affect parties across the value chain Our experience is that there are plenty of hidden traps Our perspectives are based on the new law, we note that regulatory guidance regarding the application of key measures is largely outstanding. This includes: ASIC s interpretation of the conflicted remuneration measures (guidance is expected to be released in September 2012) ASIC s guidance regarding application for Codes approval ASIC s approach to applying the anti-avoidance provisions to actions (if any) taken by companies to address the requirements of the legislation Clarity of how the grandfathering provisions will be applied to the universe of payments and arrangements impacted by the conflicted remuneration and banned remuneration measures The revised definition of sophisticated investors

5 What are the broader people impacts? Whilst FOFA programs have largely been focused on tactical solutions to ensure compliance, there are a number of more strategic challenges and people impacts, to be considered. The wealth management industry has experienced significant structural change and consolidation we expect this to continue post FOFA. Direct and aligned adviser channels will be the dominant model in a post-fofa world, with the ban on volume based benefits and commissions having the greatest impact on IFA s. This presents a number of broader people impacts, such as: Tactical changes to adviser rewards will impact the overall adviser value propositions. To keep advisers whole and your value proposition valid in the changing market, we recommend considering your total value proposition to advisers and employees Will your adviser value proposition remain valid in a post FOFA world? What role will organisations need to play in improving the professionalism of the industry? Raising the bar in terms of the professional standard of the industry developing the knowledge, skills and behaviours of financial advisers and providing the necessary support structures With continued structural change, strategic workforce planning will be critical to meet future workforce demands and drive key workforce outcomes HR due diligence and post merger integration associated with transaction activity as the vertically integrated buy IFAs How will your organisation drive key workforce outcomes such as having the right people, with the right skills, in the right position/location, with the right flexibility, at the right time and cost?

6 We are not alone the wealth management industry is changing across the globe The FOFA reforms reflect a global trend we are witnessing where by regulators are seeking to minimise conflict of interest and enhance transparency around the true cost of advice to increase customer trust and confidence in the industry. We are also seeing regulators taking action to increase the quality of representatives and the advice they are giving. We are aware of such reforms in the UK, Europe and Asia. As a result, all firms within these judicious, regardless of size, complexity or risk profile, will have to make some changes to the way in which remuneration is governed within the business, ranging from additional disclosures and formalisation of processes, through to a complete overhaul of the value change and remuneration structures. UK and Europe The EU has put out a request for proposals to cover a review of current market practice as to the way in which financial advisers compensation arrangements are structured, to specifically analyse the commission structures In the UK, the Retail Distribution Review (RDR) regime comes into effect on 1 January 2013, banning commissions for investment products (except trail commissions for products before the RDR comes into effect) and aiming to increase levels of adviser competence and make it clearer to clients when an adviser is truly independent or when they are tied. These new requirements will impact all financial advisers, whether IFA, wealth manager, multi-tied, tied, private banker or stockbroker. RDR also aims to increase the standards of competence and training for financial advisers The Netherlands will also ban commission paid to advisers and banks from 1 January The ban goes further than FOFA and RDR, banning commissions on all risk products (including mortgages and protection products). Financial advisers who operate a fee for advice based model will be monitored to ensure the cost of advice is fair Asia Across Asia, commissions continue to be a key feature of adviser remuneration. However, we are seeing some Regulators beginning to follow the building global momentum towards future state remuneration models In India, the life insurance sector is undergoing a significant overhaul, following the introduction of caps on agent commissions for unit-linked insurance plans The Monetary Authority of Singapore has launched an industry review, the Financial Advisory Industry Review which aims to raise the competency of financial advisers & the quality of firms, lower distribution costs and promote a culture of fair dealing. As part of this review, there has been a large focus on remuneration and tier structures

7 How PwC can help To have a deeper discussion about these issues, please contact: Sydney Emma Grogan Partner Phone: [email protected] Anthony James Principal Phone: [email protected] Melbourne Della Conroy Partner Phone: [email protected] Shane O Sullivan Principal Phone: [email protected] Debra Eckersley Partner Phone: [email protected] The information contained in this publication is general in nature and does not constitute advice. PwC will not be held responsible to those persons who act solely on the information provided in this document. You should seek your own professional advice from an appropriately qualified person on your company s specific situation before taking any actions on this issue PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. Liability is limited by the Accountant s Scheme under the Professional Standards Act 1994 (NSW).