Chris Joye from the AFR comments on Finance Minister Mathias Cormann’s final Future of Financial Advice (FoFA) bill:
Cormann seeks to assure consumers that a commission “is banned if it is made solely because a product . . . has been sold”.
This is part of his new definition of a commission, which lawyers say bears no resemblance to the real legal meaning of commissions under precedent laws.
The word “solely” makes the definition a farce. Cormann’s explanatory statement says: “If an employee [had] to meet a reasonable target – [like] selling 1000 products – as well as a compliance target . . . the payment would not be made solely because of general advice [and] . . . would be permitted.” In every other universe, these payments are a “commission” and/or “conflicted remuneration”.
I do not have a problem with the Coalition’s changes to the laws on “general advice”. Companies should be free to motivate sales staff, as is the case across the rest of the economy.
My main concern is with Cormann’s modifications to the “personal advice” laws, which allow planners to earn up to 10 per cent of their total remuneration in sales bonuses partly determined by how many products they sell to customers relying on personal advice.
Cormann’s logic is because he has exempted these “performance bonuses” – which planners do not support – from the ban on conflicted remuneration, they are not conflicted remuneration: “With personal advice the requirements are very stringent, so all remuneration that would conflict the advice given is banned, and the overarching requirement for the adviser to act in the best interests of the client remains in place.”
Conflicts of interest are rife in the provision of financial advice. Removal of the overriding requirement that an adviser act ‘in the best interest’ of their client leaves the door open to an array of abuses. The argument that advisers are already obliged to act in the client’s best interest is not an argument against removal of the provision. If the obligation is already implied, making it an express obligation would simply reinforce this by removing any doubt.
In my view, advisers offering personal advice should not receive any (material) incentive for recommending specific products. That would limit the potential for any conflict of interest and improve public perception of adviser integrity. And where general advice is offered, the adviser should be required to (prominently) notify readers or listeners that they (the adviser) receive incentive payments based on the products they recommend. After all, the primary concern of the industry should be to protect the consumer. In doing so, advisers will benefit from an enhanced reputation and trust from the community.
Read more at Senate has last chance to fix financial advice.