- The end of grandfathered commissions may be near
- Vertical integration predicted to survive
- ASIC is expected to increase focus on conflicted remuneration
Advisers can expect plenty of change and a few surprising elements of the sector to remain the same as the industry prepares to digest the outcomes of the royal commission.
Royal commission will drive change
The Royal Commission into Misconduct in Banking, Superannuation and Financial Services won’t deliver its final report until February. But there has already been a deluge of data in the form of written submissions from industry stakeholders and of course Commissioner Hayne’s interim report.
“We've learned a lot from evidence that's been given and the submissions that have been made about the way the royal commission is thinking about Best Interest Duty and how it has played out over the last five years,” The Fold Legal chairman Claire Wivell Plater says.
There are a few key structures that have been a fundamental part of the advice industry that have an uncertain future. These include grandfathered commissions, vertical integration, value for money in financial advice and the enforcement powers of the regulator.
It is no coincidence these issues are directly related to the Best Interest Duty and have come under significant scrutiny from the Hayne Inquiry.
Vertical integration predicted to survive
It’s easy to think that vertical integration will be banned. But a closer look at ASIC’s position and the recent submissions from the major banks suggest that this business structure looks set to remain a key feature of the Australian advice landscape.
“Vertical integration is not actually banned. It never has been and I'm going to put my neck on the block and say that it never actually will be,” Ms Plater says. “It has never been illegal to recommend an in-house product.”
So why do people think it's a problem?
The answer is a little more complex, as the laws basically fall into two categories. There are prohibitions and there are obligations. Obligations give you a choice. If you choose to do X, then you have to do Y and Z. But prohibitions are things you can't do. That's the case with vertical integration. It's not prohibited, but if you choose to recommend an in-house product, you must comply with the obligations.
“I don't believe that it will be feasible to structurally separate the provision of financial products from the provision of retail personal advice, because where do you draw the line? Instead, what I think will happen is that more attention will be paid to managing the conflicts that necessarily occur in vertically integrated businesses.” Ms Plater explains.
She says “Remuneration structures are squarely in focus as seems to now be recognised that the FOFA changes didn’t go far enough.”
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The end of grandfathered commissions may be near
A number of groups have already moved away from grandfathered commissions or are in the process of doing so. When the FOFA legislation passed through parliament five years ago, the deal largely hinged on the ability for advisers to continue earning commissions from the products sold to clients up until the law passed.
But ASIC has publicly stated it never thought grandfathered commissions would still be around in 2018.
“I genuinely believe that we will see an end to grandfathered commissions. I think that they will be banned,” Ms Plater says.
Pressure to increase on asset-based fees
Value for money has become a key focus for advisers, regulators and the royal commission. As advisers move towards professionalism and discover how to remunerate themselves without commissions, innovative pricing models are beginning to proliferate among advice practices across Australia.
“Because of the concern around value for money, we will see increased pressure on asset-based fees,” Mr Plater says.
“What we'll see, and this is happening already at a grassroots level - it's not widespread and it hasn't reached even levels where it would seem to be a trend - but we are seeing combinations of fixed annual fees and a services rate card. In other words, for this service we charge a range of fixed fees between X and Y. And even hourly rates, where it's not possible to put a fixed fee on it.
“We have seen these in some of our clients; people who are really concerned about wanting to have best practise advice practises and to demonstrate their commitment to their client's best interests.”
ASIC, accountability and conflicted remuneration
There have been important questions raised over the last 12 months about executive accountability, particularly as widespread misconduct has been uncovered among the major financial institutions.
The introduction of the Banking Executive Accountability Regime (BEAR), which comes under APRA’s remit, has been a major step forward.
However, the actions of both APRA and ASIC have been questioned by the royal commission.
Ms Plater believes that ASIC may well get a BEAR equivalent for conduct, which could extend to more businesses than the current regime, which is limited to major institutions that are APRA regulated.
“I also think we'll see a massively increased focus on conflicted remuneration. What I mean by that is employee remuneration. It will start at the executive level. We've already seen some attention paid to advice remuneration and we've seen ANZ change their remuneration structures.”
“I think we'll see more attention being paid to executive remuneration so that shareholder returns will not be as influential in determining this as they have been in the past.”
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Views expressed are of the interviewee and may not be the opinion of Netwealth or its related companies.