ASIC lays down the law, but changes too late for some clients
It details what ASIC regards as conflicted remuneration. Its issue has caused concern in some sectors of the financial advice industry, and has reinforced that from July 1 there will be two classes of investors.
Two of the main changes are a statutory duty placed on financial advisers to act in the best interests of clients and a ban on conflicted remuneration, which includes commissions and volume bonuses.
The problem with the legislation is it only applies to advice given after July 1. Anyone who received advice before its introduction will continue to have the value of their investments eroded by commissions, while those receiving advice after the introduction will be protected.
The legislation was prompted by the financial havoc wreaked during the GFC and came out of a parliamentary joint committee into corporations and financial services in 2009.
One of the main findings was that "a significant conflict of interest for financial advisers occurs when they are remunerated by product manufacturers for a client acting on a recommendation to invest in their financial product".
The ASIC guide defines conflicted remuneration as "any benefit given to an Australian Financial Services licensee, or its authorised representative, who provides financial advice to retail clients that because of the nature of the benefit or circumstances it is given in could reasonably be expected to influence the choice of financial products recommended to clients".
In other words where a person who provides financial advice to a retail investor receives commission, remuneration or benefits based on the products recommended, this will be conflicted remuneration and is banned. Benefits can include free or subsidised business equipment, entertainment and subsidised travel.
Conflicted remuneration will not include a base salary paid to an employee of an AFS licensee, but it will include a salary based on and dependent upon the value of financial products sold. This inclusion of salaries based on investment products sold has people in the financial services industry worried.
Andrew Baker, managing partner of Tria Investment Partners, on the boutique consulting firm's website posted a blog this week stating that the ban had gone too far.
Although saying that ASIC's guide to conflicted remuneration was praiseworthy in its ambitions, he believed that some parts of the ban were excessive. Baker wrote: "A good example is how it goes to tortuous lengths to restrict the remuneration of employees who sell their employer's financial products to retail investors. You can receive a salary, but you can't receive a bonus based primarily on sales success."
Baker goes on to criticise the ban on conflicted remuneration because it stops people who want to pursue a career in selling financial products from doing so. Unfortunately, Baker appears to be missing the main point of the reforms and the ban on conflicted remuneration.
Many of the people who lost money during the GFC were advised to invest in products by commission-driven advisers more intent on improving their own financial position to the detriment of their clients.
If the broad scope of the ban on conflicted remuneration forces product and commission-driven advisers out of the industry, and encourages more strategy-based advisers focused on improving a client's financial situation, the reforms will have been successful.
Max Newnham is a fee-for-service chartered accountant financial planning specialist.
Frequently Asked Questions about this Article…
The FoFA changes introduce a statutory duty requiring financial advisers to act in the best interests of clients and ban conflicted remuneration — including commissions and volume bonuses — that could influence product recommendations.
The new rules apply to financial advice given on or after July 1. That means there will effectively be two classes of investors: people who received advice before July 1 (who can still be subject to commissions) and those receiving advice after that date (who are protected by the new ban).
ASIC defines conflicted remuneration as any benefit given to an Australian Financial Services licensee or its authorised representative that, because of its nature or circumstances, could reasonably be expected to influence the choice of financial products recommended to retail clients.
Conflicted remuneration includes commissions, volume bonuses and non-cash benefits such as free or subsidised business equipment, entertainment and subsidised travel. It can also include salaries that are based on or dependent upon the value of financial products sold.
A base salary paid to an employee of an AFS licensee is not conflicted remuneration. However, a salary that is calculated based on the value or sales of financial products is included in the ban.
The reforms were prompted by the financial damage seen during the Global Financial Crisis. A 2009 parliamentary committee found significant conflicts of interest when advisers were paid by product manufacturers for client investments, which led to the FoFA changes.
Responses are mixed: some, like Andrew Baker of Tria Investment Partners, say parts of the ban go too far — for example limiting sales-based bonuses. Others argue the ban is necessary to move the industry away from commission-driven advice toward strategy-based, fee-for-service advice focused on clients' financial outcomes.
Everyday investors receiving advice after the ban should be better protected from commission-driven recommendations. Investors with advice from before July 1 remain in a different category and may still see investment value reduced by commissions, highlighting the reform's phased effect.
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