Today we'll get a preview of Repeal Day, and it’s almost entirely a good day -- almost. Apparently Tony Abbott will announce the repeal of more than 10,000 laws and regulations after six months’ work by Parliamentary Secretary Josh Frydenberg.
Potato farmers will henceforth be spared $70 per shipment certification fee when exporting to South Korea; federal certification of aged care buildings will be removed, since it duplicates state regulations; film producers won’t have to get separate classifications for 2-D, 3-D and Blu-Ray versions of the film; and banks will once again be able to pay sales commissions to financial planners.
Huh? Pick the odd one out. Yes, it’s pretty easy: banning sales commissions and other conflicted remuneration to financial planners was never a red tape burden -- it was the outlawing of a corrupt practice that has cost consumers billions of dollars and lowered trust in the entire financial advice industry.
Financial advisers don’t want it removed and have demanded that it not be included in Repeal Day.
It’s the banks that have had a huge victory getting it slipped into what Josh Frydenberg calls a historic day for the Australian Parliament. They will now be able, once again, to use financial planners like mortgage brokers, flogging investment products instead of loans. With credit growth down and staying down that is becoming increasingly important to them.
An adviser wrote to me yesterday: “It’s the financial planning community who don’t want commissions. The banks want the exception for general advice to push their products.”
The Financial Planning Association has made it clear that it opposes the reintroduction of commissions, while supporting the other amendments to FoFA.
The chairman of the FPA, Matthew Rowe, said this morning: “In my personal opinion, this is an attempt by some product manufacturers to drive the sale of their product through integrated distribution without the obligation to investigate the needs of the consumer or provide a solution that is in the consumer's best interests.
“The FPA has written formally to the government voicing its strong opposition to commissions being paid under what is being called the 'general advice' exemption. We do not believe this proposed change is in the public interest.”
The three key amendments to Labor’s Future of Financial Advice legislation that will be included in today’s mass repeal are:
1. the scrapping of the two-year opt-in for financial planning clients;
2. the removal of the general requirement to act in the best interests of clients; and
3. an exception that allows commissions and other conflicted remuneration for “general advice”, while continuing to ban them for “personal advice”.
The first two can, at a stretch, be described as red tape, but the third cannot.
Here is the full definition of general advice in the Corporations Act: “For the purposes of this chapter, general advice is financial product advice that is not personal advice.”
Personal advice, separately defined, is where the provider of the advice has “considered one or more of the person’s objectives, financial situation and needs”, or “a reasonable person might expect the provider” to have done so.
Most Australian financial advisers work for the banks and AMP. They own these “dealer networks”, as they are called, as distribution for their products.
Effective sales require incentives for those doing the selling. Those on a salary paid by the bank can get bonuses based on KPIs around the amount of product they sell, but many financial planners are employed separately, often by partly owned subsidiaries. For them, a commission attached to the product is the most efficient way to provide the incentive.
Needless to say, the fundamental problem is that the term “sales” is simply incompatible with the word “advice”, and can never be reconciled. When someone goes to a financial planner seeking advice, they are not expecting to be sold something instead.
History has clearly shown that the higher the commission, the more dangerous the product (Timbercorp and Great Southern, 10 per cent up front; Storm Financial, 7.5 per cent up front).
The other problem is that allowing commissions for general advice, while banning them for personal advice, will encourage commission-chasing advisers to not take into account their clients’ “objectives, financial situation and needs”.
If the Abbott Government were listening to financial planners, they would not be bringing back commissions.
But they’re listening to the banks: it’s the banks that want to use advisers as salespeople, and the government is giving them the green light in the name of removing red tape.