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In response to the recommendations of the Financial Services Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, new laws were passed last year that removed the grandfathering of pre-Future of Financial Advice (FoFA)1 conflicted remuneration from 1 January 2021. This means payments of grandfathered commissions will not be permitted from 1 January 2021.
This article explains what payments are affected and how the new rules will apply to advisers and licensees during the next few months.
These are grandfathered commissions paid to advisers from new deposits or contributions to a pre-FoFA financial product. Upfront commissions should not be confused with upfront Member Advice Fees. (Member Advice Fees are not conflicted remuneration because the client has agreed in writing to pay the advice fee.)
Upfront commissions must cease to be paid on new contributions/deposits after 2020. Consequently, product providers will remove entry fees and reduce administration fees or management fees for deferred/nil entry fee products, as the law provides that commission savings must be passed onto clients.
Some super funds have already turned off upfront commissions, in response the findings of the Royal Commission and the effective removal of deferred entry fee arrangements in super last year2. For IOOF legacy platform products (IPS, LifeTrack, Austchoice), upfront commission was removed from 1 July 2020.
These are commissions based on the percentage of investments in a financial product or investment and are generally calculated on the balance at the end of the month and paid in the following month. The legislation bans payments to advisers/licensees made from 1 January 2021, so for many arrangements this will mean the final commission for monthly payments will be calculated on the November account balance, as this is paid in December 2020. It is unlikely any additional amounts can be paid to advisers in December 2020, in lieu of payments ordinarily made in January, as this may be classified as a new arrangement and therefore not be grandfathered under FoFA.
Product providers are required to pass the benefits of ceasing to pay commissions back to clients as reduced fees or rebates. The Government (through ASIC) is making sure that this applies both before and after January 2021, as many commission arrangements have already been extinguished voluntarily by advisers and licensees.
2.1: How will adviser commissions be rebated back to clients?
Platform investment commissions are generally an administration cost and will therefore be credited back to the client’s investment, super or pension accounts through reduced administration fees or rebated directly to accounts.3 This will not always be an exact science because it will not always be the case that the exact amount of commission paid will paid back to the client in the form of reduced administration fees or rebates, instead it can be an approximate amount as long as it’s fair and reasonable. Most super and investment platforms already have the capacity to reduce administration fees on an ad hoc basis where advisers and clients have voluntarily turned off commissions.
Similarly, for retail managed funds and investment (insurance) bonds, product providers will be required to reduce management fees or credit amounts to accounts to take into account terminated commissions.4
Some situations will be more complex, such as guaranteed annuities, as the cost of commission was built into the original purchase price of the product. For these cases, the annuity provider will determine how commissions can be rebated back to clients.
2.2: What about Member/Investor Advice Fees?
Member/Investor advice fees, whether deducted from contributions or paid as a percentage of the account balance, are not conflicted remuneration because the client has agreed to these advice fees in writing which means these fees will continue after 2020. However, under proposed changes to the law, client/members will need to consent in writing to these advice fees on an annual basis.
These Advice Fees are separately identified on the client’s annual statement issued by the product provider and must also be included in the Fee Disclosure Statement provided to the client annually by advisers.
2.3: If the licensee receives commissions in 2020, can these be passed through to advisers in 2021?
No, the ban from 1 January 2021 applies to all payments of conflicted remuneration, including the “passing through” of conflicted remuneration from licensee to adviser. Advisers will need to ensure that licensees have processes in place to pass through commissions before the cut-off date.
Life risk insurance commission paid under a group insurance contract for a super fund is grandfathered conflicted remuneration, and these commissions will therefore cease from 1 January 2021. Retail life risk insurance, in contrast, is under an individual contract and commissions are still permitted even though the policy may be held through a super fund.5
Advisers should note that many super funds, including IOOF Portfolio Services, provide personally underwritten insurance cover via a group contract, and therefore any commission payable is grandfathered and will cease from January 2021. This applies to insurance commission through super with IOOF Pursuit, IOOF Employer and personal super; IOOF SAF and SMSF insurance, and legacy IOOF super products.
Super funds will need to decide how to pass on the benefits of removing insurance commission to members. Super funds may calculate a reduced premium or may cancel and reissue the cover without commission.
Most corporate/employer super plans don’t pay commission to servicing advisers, because no commissions can be paid from MySuper (default super). Advisers providing services to a corporate/employer super plan will generally do so under a written servicing agreement with the super trustee and/or fee for service arrangements with individual plan members. Insurance commission, however, may be payable for some choice members of the employer plan and this will cease from January 2021.
For some former employer/corporate super plan members transferred to personal super before 2013 (the start of FoFA) on leaving employment, investment commissions may still be payable. These will cease from December 2020 and advisers will need to enter into fee for service arrangements with these clients.
Adviser remuneration rules and requirements have gone through so many iterations over the last few years – through FoFA, the Royal Commission, Australian Financial Complaints Authority (AFCA), Financial Adviser Standards and Ethics Authority (FASEA) Code of Ethics - it can be hard to keep up. To help advisers make some sense of it all, we have gathered together some of the main questions we’ve been asked about removing commissions from January 2021.
Why is the Government removing grandfathered commissions now?
Under FoFA legislation pre-2013 adviser commissions were ‘grandfathered’ from being banned because it was originally thought these were property rights protected by the Australian Constitution. However, the High Court decided that to be protected, property rights had to be ‘acquired’ and not just extinguished. In the Royal Commission, Commissioner Haynes (who had been on the High Court for the decision) found there was no constitutional reason to protect adviser commissions and recommended an end to grandfathering of pre-2013 conflicted remuneration.6
Weren’t the Royal Commission recommendations delayed because of COVID-19?
Some Royal Commission recommendations – including annual consent to ongoing financial advice fees – had not passed into law by the time the COVID-19 shut down occurred in March 2020. The start date for these changes has been put back by six months at least. However, removing grandfathering of conflicted remuneration had already passed into law in October 2019 and there will be no delays to the start date of 1 January 2021.
How does receiving grandfathered commissions fit with the FASEA Code of Ethics?
Advisers are required to comply with the FASEA Code of Ethics when providing advice to a client from 1 January 2020. Standard 3 of the Code says:
“You must not advise, refer or act in any other manner where you have a conflict of interest or duty”.
“You will breach Standard 3 if a variable component of your remuneration depends on the amount or volume you recommend of those products, because your interests will, or may, conflict with your duty to act in the client’s best interests.”7
FASEA has provided an example that advising a client to stay in a product that paid grandfathered investment commissions in lieu of an alternative cheaper non-commission paying product, would be a conflict of interest.
Although the Code only applies when providing advice after 1 January 2021, some advisers and licensees have taken a pro-active position in voluntarily terminating commissions in line with the spirit of the Code.
What is AFCA’s view about grandfathered commissions?
AFCA considers that following the commencement of FoFA in 2013 “there was a legislative and industry shift at that time, creating an expectation that something of value would be provided for each fee or charge debited from a superannuation interest.” Therefore, when there was no, or inadequate services, provided post-2013, AFCA’s approach is to recommend the super trustee refund fees comprising commissions to the super fund member who has lodged a complaint to AFCA. For pre-2013 commissions, AFCA’s view is that no refund is to be expected “if the total amount charged is not disproportionate to the amount that would have been charged as an upfront advice fees.”
Will product providers be required to contact their members or investors before January 2021?
Not necessarily. Super funds and other product providers will be required to notify clients that fees are reducing, as product providers are required to notify clients if there has been a significant change to the product. However, as fees are actually being reduced, this notice can occur after January 2021.
1 Future of Financial Advice (FoFA)2 Exit fees were banned by the Protecting Your Super legislation. As deferred entry fee products recouped upfront commission partly through exit fees, these arrangements were terminated from 1 July 2019.3 Regulations require that product issuers rebate the amount that would otherwise have been paid to advisers as commissions within a year.4 Rebates credited to investment (insurance) bonds do not affect the 125% rule under tax law because amounts credited are not classified as premiums. 5 Commissions under an individual risk policy are still payable if they meet the Life Insurance Framework requirements. ASIC will review this in 2021.6 JT International v Commonwealth 2012 (the ‘cigarette packaging case’). Property rights are protected under section 51(xxxi) of the Australian Constitution. (A good excuse to watch the movie ‘The Castle’ again).7 Financial Planners and Advisers Code of Ethics 2019 – Legislative instrument and Explanatory Statement
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
DisclaimerThe information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.