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…
ASIC's regulatory guide explains what it considers 'conflicted remuneration' — benefits that could reasonably be expected to influence the financial products recommended to retail clients. It matters because the guide supports new Future of Financial Advice rules that ban such conflicts, aiming to protect investors from advice driven by commissions, bonuses or other incentives.
From July 1 the legislation introduces two key changes: a statutory duty requiring financial advisers to act in the best interests of clients, and a ban on conflicted remuneration — including commissions, volume bonuses and other benefits that could influence product recommendations.
The ban applies only to advice given after July 1. That means people who received advice before that date may still have their investment value eroded by existing commissions, while those receiving advice after the introduction are protected under the new rules.
ASIC defines conflicted remuneration as any benefit given to an AFS licensee or authorised representative providing retail advice that, because of its nature or circumstances, could reasonably be expected to influence the choice of financial products recommended. Examples include commissions, volume bonuses, free or subsidised equipment, entertainment and subsidised travel.
A plain base salary paid to an employee of an AFS licensee is not conflicted remuneration. However, a salary that is based on and dependent upon the value of financial products sold — for example bonuses tied to sales success — is treated as conflicted and falls within the ban.
Some, like Andrew Baker of Tria Investment Partners, argue the ban goes too far by restricting pay structures — for example preventing bonuses primarily based on sales success — and worry it could discourage people from pursuing careers selling financial products.
Yes. The reforms were prompted by the financial havoc of the Global Financial Crisis and reflect findings from a 2009 parliamentary inquiry that advisers paid by product manufacturers can have a significant conflict of interest. The aim is to reduce commission-driven advice that harmed many investors during the GFC.
If the ban forces product- and commission-driven advisers out of the market and encourages more fee-for-service, strategy-based advisers focused on improving clients' financial situations, the reforms will have achieved their goal of delivering less biased, more client-focused advice.
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