Unravelled, by Michelle Levy 7 min read
Some of you may have read Chief Justice Bathurst's recent speech entitled: 'Law as a reflection of the "moral conscience" of society'. If you have not, I recommend it. He speaks about the shortcomings of legislation requiring 'real outcomes' based on 'moral values'. He makes, with the greatest of respect, what should be, but frequently are not, the obvious points that moral values are not themselves obvious and are not universally shared. Referring to laws prohibiting unconscionable conduct, his Honour says: 'Now, it could be possible to take objection to legislation of this form on a number of grounds. It could be said that the legislation is contrary to constitutional principle since it vests a wide and unconfined power in the judiciary to proscribe conduct which they deem to be "unfair or "unjust".' There you go – 'contrary to constitutional principle'.
Which brings me to AFCA. I don't think I exaggerate by saying that AFCA decision makers have very wide and unconfined power to prescribe conduct (usually the payment of money) based entirely on what they deem to be fair. The website says that 'When you complain to us, we follow a complaint resolution process that provides free and fair outcomes'. Well, to the Chief Justice's point, that depends on your perspective. An AFCA decision maker might, from time to time, make decisions that complainants and firms think are unfair; they might even make them on the basis of unreliable information and an incorrect understanding of the facts – but if they do, there is nowhere to go. With limited exceptions for superannuation complaints, one cannot appeal a decision by AFCA. That seems pretty unfair.
AFCA has published 'Approaches' that outline how it will deal with certain types of complaints. The 'AFCA Approach to superannuation fees and charges' provides a particularly dispiriting example of the gap not only between how a court and AFCA might approach the same set of facts, but also between what ostensibly reasonable people think is fair (yes, I am assuming in my own favour). The Approach says that in dealing with a complaint about superannuation fees: 'AFCA will consider whether a fee debited from a superannuation product was lawful, adequately disclosed and that a service has been provided to the fund member'. It goes on to say AFCA cannot consider a complaint where the complainant is 'merely' dissatisfied with the fee. But that is to understate what AFCA cannot, in fact, consider. Under the Rules, AFCA must exclude a complaint about the level of a fee. A complaint about whether a service was provided for a fee, or whether the value of a service was commensurate with the fee, is, in substance, a complaint about the level of the fee. Nevertheless, the Approach document says that when AFCA receives a complaint about a fee, AFCA will consider whether, among other things, there was a service provided for the fee. So, from that rather unsound base, the Approach turns to FOFA.
It says that 'FOFA represented a legislative and industry shift, creating an expectation that something of value would be provided for each fee or charge debited from a superannuation product'. This is a brave statement, which does not appear to be based on any evidence (but then, AFCA does not need any in making a decision in relation to a complaint). FOFA banned the payment and receipt of conflicted remuneration from 1 July 2013. Conflicted remuneration did not (and does not) include commissions paid by product issuers for the sale of products before 1 July 2013. FOFA did not relieve product issuers of their obligations to pay commissions under contracts that had been entered into before that date. To the contrary, the grandfathering provisions were included in FOFA precisely to preserve existing obligations and protect existing rights. Some might think it would have been unfair to cut short the consideration payable to an adviser by a product issuer that continues to benefit from the adviser's efforts. Of course, whether or not it was, or is, fair is not relevant to the lawfulness of those arrangements.
Nevertheless, AFCA says that from 1 July 2013, 'there is an expectation that something of value is provided in return for each fee or charge debited from a superannuation product', and the Approach document explains AFCA's approach to complaints about fees used to pay grandfathered sales commissions. It says that trustees won't have to refund 'genuine deferred sales commissions, payable for a limited period, instead of an upfront advice fee, for advice given before 1 July 2013', provided that the 'total amount charged is not disproportionate to the amount that would have been charged as an upfront advice fee'. This is likely to be cold comfort, since 'genuine deferred sales commissions' are, in my experience, always payable for so long as the product is held by the client. This is because the product issuer continues to benefit from the issue of the product to the client for so long as the product is held. As to why the amount should be linked to the value of advice, that too is unclear – again, commission is a payment for services to the product issuer, not the client.
If that is troubling, the position for trustees that have paid or pay grandfathered commissions is much worse after 1 July 2013. Here, AFCA expects that 'Trailing commissions or conflicted remuneration described as a fee (including if bundled into a 'product fee')' to be refunded unless something of 'commensurate value was provided in return for the fee'. Before going to the substance, the reference to trailing commissions or conflicted remuneration 'described as a fee' suggests there has been some misrepresentation by trustees. It was commonplace for commissions to be funded by trustee fees: contribution fees, administration fees and investment fees. That does not mean the fee charged by the trustee is not a fee and it does not make the commission a fee charged to the member. If the trustee waived its entitlement to the contribution fee, administration fee or the investment fee, it would still have an obligation to pay the commission.
All of this might sound pretty tawdry – but it was, and is, lawful and 'expectations' of members have nothing to do with it. It is also worth pointing out the SIS Regulations did, and still do, give a trustee of a public offer superannuation fund the power to 'pay commission in consideration of the person procuring applications for interests in the fund provided that the member has been notified in writing of the amount or rate of the proposed payment of commission'. And, consistent with this, the old KFS regime included prescribed wording about the payment of commissions. It is a bit rich (some might say unfair) to say that in all of these circumstances it is not fair for a trustee to refuse to rebate trailing commissions to the members because the members got nothing of value. They got their interest in the fund. Whether the fee they paid to maintain that interest was too high is another question altogether and something AFCA has, in my view, no jurisdiction to consider.
I may sound a little hot under the collar about this – and I am. I think it is unfair to require trustees to compensate members for money the trustees have lawfully paid to advisers for services rendered by the advisers to the trustees. When the trustees have to refund that money, there is no corresponding power for the trustees to claw back commission from the adviser, and rightly so. And, while on the topic of unfairness, there are a number of cases before the courts at the moment that will consider the lawfulness of commissions paid by trustees from members' funds. It is entirely possible that a court could determine that they have acted lawfully but that AFCA will require the trustee to refund members for the commissions paid. Because decisions made in accordance with the Approach are superannuation complaints, there are some grounds upon which they can be appealed. Whether a trustee will have the stomach to do so is another question. In my view, it would be better, and fairer all round, to let these matters be decided by the courts in accordance with the law, and not with what an AFCA decision maker thinks is fair.