Unravelled, by Michelle Levy 5 min read
Dear clients and colleagues
You would not be surprised to learn there are a number of topics off-limits to the contributors of Unravelled at the moment, so we have been pretty pleased with ASIC's productivity over the last few weeks. The biggest news was the release of the new fees and costs disclosure instrument and RG 97 (disclosure of fees and costs), together with reports on ASIC's consultation and consumer testing; but there is also a new RG 209 on responsible lending – ASIC was not going to wait to see what the Full Federal Court might have to say on the topic and it has proved to be good to its word; a paper on the shortcomings of disclosure (true) jointly authored with the Dutch financial Markets authority and a report on its findings on financial advice provided by super funds (apparently they are doing a pretty good job).
At the same time, the next instalment of the industry survey on grandfathered remuneration has kicked off. The purpose of collecting information about how much is still being paid in grandfathered remuneration is slightly mysterious given grandfathered conflicted remuneration (on investment products and some life insurance products) has only 12 more months to run. In case you missed it, the relief for commissions paid under pre-FoFA arrangements ends on 1 January 2020. In any case, whatever the value in tracking what might be anticipated to be the declining value of grandfathered conflicted remuneration, one might think it has been undone - ASIC has decided its questions don't mean what it said they meant last time, and so has changed the instructions halfway through. Where ASIC said it was asking only about commissions on funds under management, it now wants to know about commissions on contributions and insurance premiums as well. Apart from making it harder for the recipients of the survey to respond, one might think that the responses will be of little use for the purpose of comparison.
And while I am speaking about grandfathered conflicted remuneration, you will recall Commissioner Hayne recommended a ban on lenders paying commissions on loans to mortgage brokers, and that mortgage brokers should have a duty to act in the best interests of their customers. A Bill has been introduced into Parliament which purports to do both. But neither is quite what was recommended. First, the best interests duty – it will apply to the credit licensee or credit representative (the company) and not to the individual broker. Remember that the financial adviser's best interests duty applies to the individual adviser and not to the authorising licensee or authorised representative. The duty is based in the trust and confidence that should exist between the adviser and their client and it is entirely unclear why the drafters have chosen a different course here. The Explanatory Memorandum gives nothing away. I may not be around to know whether much or anything turns on it, but it would be nice to know that someone had turned their mind to it and to know it just wasn't an accident of the drafting.
This is not the only difference between the regime that applies to financial advisers and the regime that will apply to those who recommend loans. The best interests duty will not apply to lenders when they recommend their own loans and will not apply to brokers that only distribute one lender's loans. In short, it means a borrower can go to the bank or a tied broker who will sell them a loan – the customer will know what they are getting, and it will not include independent advice. If, instead, the borrower goes to see a mortgage broker, they can expect the broker to recommend the loan that, with luck, best suits their needs. This seems to be a perfectly sensible model in many respects; but it is one that was roundly rejected by the then government in designing the best interests duty and conflicted remuneration regime for financial advisers back in 2012. That duty and that ban apply equally to the issuer of the financial product, the tied salesperson and the adviser. The Government has been promising to change the definition of general advice for some time to make it easier to provide information and general advice to customers – I reckon it is time to think about whether the law should be changed so that, like what is now proposed for mortgage broking, it distinguishes between a salesperson and adviser and applies different duties to each. That is likely to be much more effective.
If that makes sense, what doesn't make sense is allowing a person who is charged with acting in someone else's interests to receive commission. Commissioner Hayne was alive to this and spoke at length about the irreconcilable conflict between an adviser's duty to act in another person's interest (a mortgage broker will also be an adviser) and their personal interest in being paid a commission – hence his recommendations. The Bill has all the paraphernalia – it has a definition of conflicted remuneration which mirrors the definition under the Corporations Act and it includes provisions banning the payment of conflicted remuneration by lenders and the accepting of conflicted remuneration by brokers. The Explanatory Memorandum explains that the Bill bans conflicted remuneration. But, it doesn't. The Bill bans conflicted remuneration only if regulations are made to do so. There are no draft regulations and there is lots of time for lobbying and compromise.
And so to end the year with one of our favourite topics - financial product advice by superannuation funds. This is what ASIC said in the media release about its report on financial advice provided by superannuation funds to their members: 'Overall, we found that the quality of personal advice provided to members was generally appropriate'. Generally appropriate is not really what one might hope for – but even that seems to be overstating what ASIC in fact found, which was that 51% of files reviewed 'did not demonstrate full compliance with the best interests duty'. I think that means 51% of the advice reviewed did not comply with the law. But don't worry, the report includes some practical tips for improvement. Reading this report is, in fact, like entering a parallel universe – what happened to 'Why not litigate?' and has ASIC not noticed what the Full Federal Court has had to say on the same topic?
Well that’s it for 2019 – we will be back in 2020 for our 7th year. I wish you a happy Christmas and a terrific New Year and a big thank you for reading Unravelled.