If you are not a mortgage broker, or the subject of a case study that has been referred to one or both of the regulators for possible further action, you might well heave a sigh of relief following the release of the Royal Commission Final Report and the Government’s response. The fact that the share prices of the major banks responded positively to the releases, shows that even the banks (or, at least, the banks’ shareholders) are relieved.
It may be too early to celebrate. Yesterday, in an interview, Chris Bowen said “…we regard this report as being the minimum of action that should be taken to improve Australia’s Banking and Financial Services sector.” It sounds like the Shadow Treasurer thinks the recommendations did not go far enough.
Whilst the Final Report was not the nuclear event it was widely expected to be, it is not a great time to be a regulator. The regulatory environment must be grim when a Royal Commissioner recommends a law to oblige the regulators to cooperate with each other! Ouch.
Even if the Final Report was a bit of a damp squib, superannuation funds will need to adapt to a changing regulatory landscape. Which brings us to the real purpose of this article.
This is not a summary of the recommendations; a number of summaries have been published by industry bodies if you want one. Rather, over the coming weeks we will be publishing brief articles focusing on specific themes arising from the recommendations, and the Government’s responses, that we think may be of interest to you.
In this article, we focus on grandfathered conflicted remuneration and ongoing fee arrangements.
Grandfathered conflicted remuneration
The Government’s response to recommendations 2.1 and 3.3 would see an end to grandfathered conflicted remuneration by 1 January 2021. So, grandfathered commissions have effectively been grandfathered for another two years. Perhaps we should now refer to them as “great-grandfathered” commissions.
Interestingly, the benefits of removing grandfathering will be required to be rebated to applicable clients where they can reasonably be identified. If they cannot be identified, the benefits must be passed through to members indirectly (eg through lower fees). This may lead to some interesting outcomes.
Take, for example, two members both of whom pay an administration fee of $500 per annum. Conflicted remuneration is currently paid from the administration fee in respect of Member A. No conflicted remuneration is paid in respect of Member B. When grandfathering is removed, Member A receives a rebate of $50. Member B will now effectively be paying more than Member A for the same services. This is just one example; conflicted remuneration is funded in different ways and each can give rise to unique issues.
To ensure that the benefits of removing grandfathering flow through to clients, the Government, in its response, has said it will commission ASIC to monitor and report on the matter.
Superannuation funds that still pay conflicted remuneration will need to have a full understanding of the source of any conflicted remuneration that is paid and how the benefits of the removal of grandfathered commissions should be passed back to members.
Ongoing fee arrangements
Under recommendations 2.1 and 3.1, ongoing fee arrangements between members and their advisers will need to be renewed annually and trustees will need a member’s express written authority to the trustee after each renewal authorising any deduction from the account for the payment of the advice fees.
Currently, many funds rely on a general authority granted once by the member at the commencement of the arrangement and rely on the adviser to notify the fund if the arrangement is not renewed. This will not be possible under the recommended regime. Under the new regime the authority granted to the trustee by the member (to deduct and pay the advice fee) will need to be renewed annually. Most funds will probably delegate responsibility for this to the adviser and simply turn off the deductions/payments if the authority is not renewed. In any event, systems and disclosures will need to change.