Retreat on financial planning rules to hit investorsPUBLISHED: 08 Feb 2014 03:44:57 | UPDATED: 09 Feb 2014 05:12:31 - http://www.afr.com/
Cecily and Robin Herd on Friday: the collapse of Storm Financial ruined their retirement plans. Photo: Glenn Hunt
Duncan Hughes, Sally Patten and Christopher JoyeFinancial planners will once again be able to earn commissions for selling a wide range of investment products after a federal government decision to water down investor protection laws.
Assistant Treasurer Arthur Sinodinos is consulting the industry on draft rules, drawn up after heavy industry pressure, that will make it easier for advisers to receive commissions and other so-called “conflicted payments” provided they have not tailored their advice to the client’s personal circumstances.
The proposed changes will apply to the Future of Financial Advice or FoFA reforms that have cost industry $1 billion to implement and followed a spate of collapses including Storm Financial and Trio Capital. Major banks and wealth managers are moving quickly to take advantage of the softer rules.
Leaked MLC documents for financial planners obtained by AFR Weekend reveal the National Australia Bank-owned wealth manager plans to impose a new annual “dealer facilitation fee” of up to 0.5 per cent of clients’ assets under management.
Commonwealth Bank of Australia’s CommInsure division is offering $985 “scholarships” to advisers so they can attend a conference in Toronto. The original intention of the FoFA reforms was that volume-based sales payments and soft-dollar incentives such as overseas trips would be banned. A spokesman for Mr Sinodinos confirmed that under the government’s changes products sold pursuant to general advice, that is advice given without a review of the client’s financial affairs, will not be subject to the ban on conflicted remuneration.
“The current ban on conflicted remuneration captures a far wider range of circumstances than was originally intended and has resulted in significant compliance costs for industry,” the spokesman said.
Conflicted remuneration was less likely to cause a detriment to the client because general advice was less likely to influence a person’s investments decisions, he said. Industry experts told AFR Weekend practically all types of investment products could be sold under general advice.
The return to the widespread payment of commissions to financial planners is partly due to loose drafting of the laws by the previous Labor government. That has enabled banks and wealth managers to reintroduce soft-dollar incentives and new fees in an apparent effort to encourage advisers to sell their products.
Critics of the changes to the Abbott government’s reform package claim they have “gutted” the laws that were intended to boost transparency, protect investors and improve access to advice.
“This goes way beyond tidying up, or tweaking some regulations,” said David Whiteley, chief executive of Industry Super Australia, which represents six million industry fund members.
“This is about wide-ranging changes that go to the very heart of the proposed reforms,” he said.
Michael Chaaya, a partner at legal firm Corrs Chambers Westgarth, said the changes to allow commission relating to general advice were a “significant watering down of the FoFA regime”.
“What the government is doing right now is slowing down the process of building a professional financial services sector and going down the cheap popular path of least resistance rather than doing the hard yards and lifting standards,” said opposition spokesman for financial services Bernie Ripoll.
MLC documents being distributed to advisers, marked “confidential”, state the fee will cover research “and assessing the suitability of the product” for clients. The fee is paid to the licensee who typically return it to the adviser.
Tim Mackay, principal for Quantum Financial, an independent financial adviser, said the new charge appeared to replace volume bonuses, which were to be banned because of concerns they might compromise the quality of advice. “Simply replacing a banned fee type with a renamed fee type sends entirely the wrong message to consumers,” he said.
MLC denied the fee was in any way linked to volume payments.
“The [dealer facilitation and adviser service] fees are linked to the advice planners are providing their clients, rather than any volume incentive,” said a spokeswoman.
“The dealer facilitation fee is a fee for the advice services provided by the dealer group that that particular independent financial adviser is part of,” the spokeswoman said, adding that the fee covered research and product assessment, IT services and other support.
Independent planners argued adviser “scholarships” from CommInsure for a “Million Dollar Round Table” in Canada later this year could be an attempt to get around the planned ban on offering “soft-dollar” incentives, or junkets, to top performers.
Funding for the event, which is a meeting of some of the world’s leading insurance salespeople and financial advisers, covers $985 registration and more than $500 in discounts.
Some advisers claim restricting scholarship applications to those who are “regular writers of life insurance” for the bank means it is an incentive to flog its products.
CBA said eduction and training payments are allowed under FOFA.
The legislation has also been amended to make it easier for volume-based rebates to be paid to platforms by fund managers. Under the existing rules, a platform must be able to prove that a rebate “may reasonably attributed” to efficiencies gained by the fund manager due to economies of scale. The draft legislation allows for rebates to be paid if they “can reasonably be attributed towards economies of scale.”