Conflicted Remuneration

Conflicted remuneration remains a hot topic as both ANZ and IOOF have confirmed that their in-house advisers will continue to charge grandfathered commission payments on certain products, rather than following suit with their competitors in banning the payment structure. This comes after Macquarie Bank and BT Financial Planning Group both announced that they are scrapping the controversial remuneration structure which, they claim, will benefit 17,000 and 140,000 clients respectively. BT Financial Group customers will see the biggest benefit spanning across Westpac, St George, Bank of Melbourne and Bank SA. 

But is this as it appears to be? Macquarie and BT are only able to ban grandfathered commission payments from being received directly by their in-house advisers listed on their own P&L statements. Customers who have received external financial advice leading to an investment in Macquarie and/or BT will probably not gain any benefit. External advisers are likely to still be permitted to charge commission payments as their fees form part of their own P&L statement, and not the licence holder’s. 

Additionally, Macquarie and BT are not the only financial service providers within the industry to move away from in-house advisers receiving grandfathered commission payments. AMP figures show that their own advisers haven’t received any benefits of this kind since July 2014, and CBA is of similar standing. 

Consumers should be particularly interested in this issue, if they hold ANZ investment products as they may or may not be investing in a product which generates a commission benefit for their adviser. The remuneration structure will depend on the type of product that the customer holds, and whether that product falls within the category of a grandfathered commission product. If, however, the customer invests with AMP, the remuneration structure for the investment will depend on how the adviser is connected with AMP. AMP’s in-house advisers are now banned from receiving a commission benefit from the investment product, but an external adviser is not caught by the same ban and may continue to claim commission payments for the foreseeable future. 

In the midst of industry turmoil, NABs Chief Executive, Andrew Thorburn, is sitting on the fence. He agrees that the remuneration and bonus structures need overhauling, but questions whether a blanket ban is the right way to go, echoing ANZ’s stance of a ban not being commercially sensible. NAB has emphasised the need to remove the importance of financial targets in favour of a more customer-driven outcome where progression and encouragement is the reward. He went as far as saying that ‘even when the industry had the wrong incentives, not all advisers abused them’, and so it is unnecessary to scrap the payment structure altogether. 

ANZ’s argument for supporting the status quo is that it would help keep costs associated with financial advice in check. Financial Services Law Firm, Cowell Clarke, has also offered its view in support of ANZ’s position, claiming that commission payments have provided a base rate for advisers, enabling the industry to offer advice at a competitive rate. The Professional Planner has suggested that the Treasury needs to come to the party and offer recommendations on alternative structures that are not detrimental to the industry. 

Treasury’s Response

And that’s almost what the Treasury has done. In its paper entitled Background Paper 25: Legal framework governing aspects of the Australian Superannuation System, the Treasury has made it very clear that its views are in no way recommendations but, instead, seeks to set out the issues involved, and the trade-offs which will need to be considered by the Banking Royal Commission. 

The Paper highlights a number of issues, including the receipt of conflicted remuneration, integrated business models and regulator resources. The latter is particularly timely as ASIC has come under fire from the House of Representatives Economic Committee in respect of its connection to the poor cultural issues and misconduct being evidenced in the Banking Royal Commission. The Treasury has noted that discussions surrounding ASIC’s resources should include more than just funding requirements, to include capability resources such as staff development and appropriate operations for effective regulation. This may, naturally, lead on to question how ASIC is ultimately funded by the Government. 

Notably, the Treasury has offered its view in relation to the question of suitable business structures, and whether vertically integrated business models are really the catalyst for poor culture, inappropriate financial advice and a strong dependency on grandfathered commission payments. The Banking Royal Commission has found that inherent misalignment of standards and incentives is visibly present within the financial services industry, but notes that they are present in both horizontally and vertically integrated business models, and so they do not provide any substantial concern. 

What’s Next?

The wider issue, it seems, still surrounds conflicted remuneration, and how this is best managed. The Treasury agrees that this conflict undermines the basic requirements of ensuring the clients’ interests prevail. However, the solution to removing, or limiting, the possibility of conflicted remuneration, is not a path well-trod. The consequences of removing the exemptions to the FOFA reforms are so varied that you cannot consider them in isolation, with consideration required of the trade-offs necessary to counter balance the removal. 

The premise behind the FOFA exemptions were to allow the financial services industry a period of time to adjust their business models in readiness for the loss in revenue. Unfortunately, the restructuring expectation has largely been ignored, and so the effect of any removal or limitation will come down to the particular entity involved, and how they choose to deal with the loss in revenue. BT Financial Planning, when banning the remuneration structure, chose to pass on the benefit directly to its clients, with BT bearing the cost of the new arrangements, leaving advisers no worse off. But, a competing entity may choose not to follow suit, and as a by-product, cause the adviser to pass on a loss in revenue to the client through increased fees. 

Right now, it is difficult to see who the winners will be. But one thing is for sure, hard and fast changes to the financial services industry are not likely to be imminent; after all, the industry, and regulators alike, have a duty to protect the Australian economy. So whilst the industry, the regulators, and the community are all looking for answers which go beyond the Treasury suggesting that consumers need to take more responsibility for their investment choices, there is more at play than first meets the eye.