Nine ways sales incentives have been brought back to financial advice Industry Super Australia (ISA) has identified nine ways the Government's regulations have brought back commissions and other incentives for financial advisers to sell superannuation and other products to Australians. While the Government is considering its response into the Senate Inquiry into ASIC and Commonwealth Bank (which recommended a Royal Commission), it has also removed a raft of consumer protections for people seeking financial advice. The fine-print of the regulations reveals a range of loopholes and caveats. "Despite assurances from the Government that the ban on conflicted remuneration will remain, ISA has identified nine ways in which commissions, sales incentives and conflicted remuneration have come back," Mr Whiteley said. "When you analyse the fine-print, it is clear that the banks' lobbying has been successful and they will once again be able to pay incentives to financial advisers to sell their products. "Financial advisers cannot act as impartial advisers and receive sales incentives from banks. "Once again, people seeking financial advice will need to wary of being sold something as well", said Mr Whiteley. Nine ways commissions and kickbacks have been reintroduced by the Government and banks: 1. The general advice exemption which provides significant scope for advisers to get around the ban on commissions and conflicted remuneration 2. Allowing commissions on execution services a loophole to keep commissions by having a different adviser execute or implement the advice that another adviser initially provided 3. Allowing banks to pay commissions on all basic banking products extending the already broad exemption for basic banking products so that it applies for all staff including financial planning staff 4. Permitting ongoing asset fees indefinitely 5. Commission-based bonuses paid to bank financial advisers via 'balanced scorecards' to incentivise product sales only bonuses that didn't include product sales targets were allowed under FOFA 6. Extending grandfathering so commissions can be traded advisers would continue to receive grandfathered commissions without client approval when they move between licensees 7. Permitting commissions to be automatically transferred from a client s super product into a new pension product with the same provider 8. Creating an exemption for 'permissible revenue' to enable commission based bonuses to be paid 9. Allow banks to pay wholesale commissions to advisers based on volume of sales opaque commissions worth billions Media contact: Rebecca Nicholson 0409 216 053 The opinions above are those of the author in their capacity as spokesperson for Industry Super Australia (ISA). ISA, the authors and all other persons involved in the preparation of this information are thereby not giving legal, financial or professional advice for individual persons or organisations. Consider your own objectives, financial situation and needs before making a decision about superannuation because they are not taken into account in this information. You should consider the Product Disclosure Statement available from individual funds before making an investment decision. Industry Super Australia Pty Ltd ABN 72 158 563 270, Corporate Authorised Representative No. 426006 of Industry Fund Services Ltd ABN 54 007 016 195 AFSL 232514 Media Release 3/07/2014 @IndustrySuper www.industrysuperaustralia.com
COMMISSIONS BY ANOTHER NAME How the FoFA changes will re-permit conflicted remuneration David Whiteley, Chief Executive Robbie Campo, Deputy Chief Executive Mathew Linden, Director of Public Affairs
Commissions by another name Check the fine print: How the FoFA changes will re-permit conflicted remuneration The Government has announced it will proceed with watering down the Future of Financial Advice (FoFA) laws. On 26 June new regulations were made which enact most of the changes from July 1 2014 effectively pre-empting the parliamentary debate on the legislation. Much attention has been given to the Government s recent announcement that it will retain the ban on product commissions where general advice is provided. However, the general advice exemption will still permit a range of other conflicted payments to be made. The Government s proposals will also lift the ban on a number of other incentives that can be paid to financial advisers by banks and other product providers, including permitting explicit commissions for execution services accompanying advice and the extension of grandfathering on upfront and trail commissions. This briefing is based on ISA s analysis of the Minister s public statements, the Bill, and the Select Legislative Instrument 102, 2014 made on June 26, 2014. Please direct questions and comments to: Robbie Campo Deputy Chief Executive Mobile: 0400 565 760 Matthew Linden Director Public Affairs Mobile: 0407 430 613 mlinden@industrysuper.com Commissions by another name 1 www.industrysuperaustralia.com
Changes made by regulation with effect from 1 July 2014 until 31 December 2015 Allowing conflicted remuneration to be earned by staff giving general financial advice. The exemption has broad application to advisers and other staff working for banks, their subsidiaries and any licensee selling an inhouse product. This would permit incentives to drive mis-selling of complex products, given that basic banking products are already completely exempt This carveout will: While the exemption has been revised to reaffirm the ban on explicit product commissions this carveout will still enable incentives to be paid if they are not 'solely' related to the sale of a financial product. This leaves open many other types of incentives: Unlimited 'payments' which are not 'solely' related to the sale of the product via general advice. For instance, payments which are based on aggregate product sales across more than one class of product, or payments which relate to aggregate product sales and other criteria (for instance customer satisfaction) Unlimited payments which relate to the adviser getting a share of revenue above a set revenue target also seem to be allowed Other unlimited benefits which are not 'payments' for instance, soft dollar benefits, equity benefits, access to pay increases and rebates Allowing such incentives will cause the same bias as is caused by commissions. Access to the bonus, benefit or other incentive will be contingent on sales targets being met. This carveout will: Encourage more opaque forms of conflicted remuneration on complex products super products, retirement products, leveraged products and derivative products Create a strong incentive to sell complex products through general advice channels (including call centres, business development staff, seminars and online sales as well as by financial advisers) rather than providing tailored personal advice Apply even when general advice is provided by a financial adviser, provided they are limited to working in general advice channels (seminars, business development, business banking) Reduce transparency for general advice there is no requirement to keep records or disclose the incentives to the consumer Have broad application to advisers and other staff working for banks, their subsidiaries and any licensee selling an in-house product Examples: A financial adviser works in a business development role to sell super and other products to business and retail customers of a bank. While the adviser does not deliver personal advice to any clients, his job title refers to him as Financial Adviser. The adviser conducts seminars and visits workplaces. The adviser has sales targets to sell a certain number of MySuper, income stream and insurance products per month. In addition, a premium is available for new business and other referrals which lead to sales. If the adviser meets certain targets in terms of annual sales, he is entitled to a professional development trip held in Hawaii. If the adviser meets targets over a defined period, his base rate of pay increases and he becomes entitled to a rebate on the revenue he generates over a certain threshold ie. he gets a rebate of 40% of the revenue he generates over a threshold set at 150% of his salary. The adviser has other targets to meet in relation to customer satisfaction and compliance but no payment/benefit is earned unless the sales targets are met. A managed investment scheme promotes its products, which involve margin loan facilities, via seminars and call centres, with wealth consultant staff who are qualified advisers but do not provide personal advice. They are remunerated entirely on the basis of reaching revenue targets, based on the combined amount of product sold. In neither situation does the adviser need to flag to customers that they stand to gain an incentive or benefit from the recommendation. Commissions by another name 2 www.industrysuperaustralia.com
Changes made by regulation with effect from 1 July 2014 until 31 December 2015 (continued) Allowing commissions on execution services, even when personal advice has been provided to the client by another representative Allowing banks to pay commissions on all basic banking products Create an obvious loophole by allowing commissions and other incentives to be paid/received when advice is implemented by a adviser other than the adviser who provided the advice Apply to complex and leveraged products including MySuper Extend the already broad exemption for basic banking products so that it applies for all staff (including financial planning staff) and exempt all basic products including consumer credit insurance A client obtains a financial plan from a financial adviser (who works for a bank owned advice business) on a new super product and a leveraged share portfolio using the bank s margin loan facility. The client is then referred to another person who executes the advice. A percentage based platform facilitation fee and brokerage fee is paid for the execution services. If aggregate levels of FUM are reached with the platform, a % of total fund management fee is rebated on a quarterly basis ( volume rebate ). The permissible revenue exemption in regulation 7.7A.15 then deems that revenue or benefits which are exempted as conflicted remuneration can be passed on to others and remain unconflicted. The remuneration earned on execution services could therefore be shared within the licensee, licensee s shareholders, staff and advisers (including the adviser providing the initial advice) as bonus, dividend or even as a direct pass through of the commission. Alternatively, advisers could execute one another's advice and become entitled to commissions, volume rebates and other conflicted remuneration. Bank advisers, tellers, call centre and business development staff will be able to earn commissions on all basic banking products even where personal advice is provided. Commissions by another name 3 www.industrysuperaustralia.com
Changes made by regulation with effect from 1 July 2014 until 31 December 2015 (continued) Allowing ongoing asset based fees to be paid on an indefinite basis, even if no ongoing advice provided Allow product providers, like retail super funds, to allow advisers to deduct ongoing asset based fees which cause the same conflict and compounded erosion as trail commissions Enable ongoing fees to be deducted without any requirement for ongoing advice to be provided Cost Australians previous research has shown that around 3 million Australians were paying ongoing fees without receiving ongoing advice 1 A bank adviser sees a client and recommends the in-house super product which allows the deduction of a 0.5% ongoing advice fee and a 0.5% dealer facilitation fee. Based on typical salary and super balances, this could reduce the client s retirement balance by around $97,000 over their working life 2 2 Using ASIC Moneysmart superannuation calculator. (Inputs: AWOTE, 1.0%, 40 year time span, starting balance $10k) 1 Roy Morgan (2011) Retirement Planning Report, June 2011 and ISA estimates Changes made solely by regulation Allowing banks to pay commission-based bonuses to their financial advisers via balanced scorecards to incentivise product sales Allow banks to incentivise their advisers and other staff based on sales volume, according to a balanced scorecard. Sales targets need to be achieved to earn any bonus and bonuses of up to 10% will be permitted. Currently, bonuses can only be paid if they do not influence advice provided Permit bonuses to be paid on top of other exempted conflicted remuneration. Banks could pay performance bonuses to all staff including financial advisers providing personal advice on complex products including MySuper A bank adviser has a balanced scorecard which sets certain targets required to be met to earn a 10% bonus. The adviser must sell a minimum number of products in defined categories, reach minimum revenue targets, meet new business targets (ie. can t just service existing clients), meet minimum compliance and customer satisfaction measures. However, no bonus can be earned unless each target is achieved sales targets must be achieved to earn any bonus. Commissions by another name 4 www.industrysuperaustralia.com
Changes made solely by regulation (continued) Extending grandfathering so commissions can be traded Enable advisers to continue to receive grandfathered commissions (commissions that are allowed to continue indefinitely as they were entered into pre-fofa) without client approval when they move between licensees Result in many clients paying for grandfathered commissions despite receiving no advice or having no ongoing contact with their adviser Reduce individual and aggregate retirement savings as many of these grandfathered commissions are paid from super products An adviser works for XYZ, a financial institution which produces a range of investment, super and insurance products. They have a trail book of C & D clients that generates a stream of income for the adviser, but the clients are largely passive. The adviser wants to change licensees, and this exemption will allow them to take the book with them. Alternatively, if the adviser wants to sell the book to another adviser, this exemption will facilitate the sale of the book to XYZ or to another adviser. Alternatively, if the adviser leaves the industry, XYZ inherits the orphaned commissions which it can retain or on-sell to other advisers who buy the income stream it generates. Permitting commissions where the client takes up a new pension product Enable grandfathered commissions on a super accumulation product to automatically apply, without client approval, where a client retires and is advised to take up a pension product with the same provider Incentivise advisers to only recommend a pension product from the same provider even if other products are likely to be better value The trail commissions will apply when client assets are greatest and therefore commission revenue maximised A client seeks retirement advice from their adviser. The client s super has remained in an ABC retail superannuation product which pays a 0.5% commission to the adviser, as well as a volume rebate based on aggregate client FUM to the adviser s licensee. Under this grandfathering, the client can be placed in ABC s pension product and the commission will be grandfathered. The adviser has obtained the client s agreement at the outset that they will only consider ABC s pension products. The trail commission alone is worth $1,750 a year for a client with $350,000 of super placed into a pension product. Allowing commissionbased bonuses to be paid on permissible revenue Allow conflicted remuneration payments to advisers that would otherwise breach the conflicted remuneration prohibition i.e. commissions earned for execution services could be passed to other advisers Allow Grandfathered revenue received by a dealer group (for instance volume rebates) to be passed to new advisers A planning business has an execution arm which implements advice and is able to generate commission and volume rebate income. As these benefits are received by a representative who has not provided the personal advice to clients, they are exempt as conflicted remuneration. The revenue is paid into a pool which funds a bonus scheme for advisers. Commissions by another name 5 www.industrysuperaustralia.com
Changes made through amendment to the Corporations Act Allowing banks to pay wholesale commissions to advisers based on sales volume (volume rebates) Re-allow these wholesale commissions to be passed on to advisers. Volume rebates are a significant and opaque wholesale commission worth billions of dollars per year to advisers and advice businesses XYZ dealer group recommends products via an arrangement with a platform operated by QWERTY Wealth. QWERTY has white-labelled the platform which is promoted as XYZ Platform. Based on the amount of FUM placed in QWERTY s platform, XYZ becomes entitled to a scale efficiency rebate on fund management fees based on reaching certain FUM targets. QWERTY ask XYZ to provide assurances that the payment of the rebate does not influence the advice provided. The rebate forms part of XYZ s profitability which flows through to dividends for the shareholders, who are advisers in XYZ s advice business. Commissions by another name 6 www.industrysuperaustralia.com