Super members are at risk of being charged dodgy fees due to a loophole in the very legislation designed to protect them from unscrupulous financial firms.
After the revelation that clients of some of Australia’s largest financial institutions were still paying financial advice commissions that were initially meant to be banned in 2013 – and often receiving no services in exchange for those fees – Treasury has unveiled draft laws to abolish the practice.
But leading industry bodies have slammed the draft laws for including a loophole that one industry body said will allow financial product manufacturers to “completely avoid” the ban, leaving members open to conflicted financial fees.
While the Regulations and the Exposure Draft Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 will repeal the current provisions allowing the grandfathering of conflicted commissions, it also includes a notable loophole.
Dodging the ban
Under the current draft, commissions would remain legally grandfathered, but with a legal compulsion for that money to be rebated back to the customer.
But the draft law does not give explicit instructions on how these rebates are to be handled. Essentially, the rule book for institutions returning money to members will be written by the very institutions required to make the refunds.
Industry Super Australia (ISA) described the rebate scheme as an “exemption” to allow financial institutions to maintain conflicted remuneration structures.
“Let’s not forget that grandfathered commissions remove money from consumers’ accounts without their express consent. This is akin to stealing money,” ISA chief executive Bernie Dean said.
“This is money that would otherwise have been maintained in a consumer’s account, and instead was siphoned off to pay financial advisers for nothing.”
Australian Institute of Superannuation Trustees (AIST) chief executive Eva Scheerlinck said the proposal to ban conflicted remuneration was a “key recommendation” made by the royal commission, and should not be softened or watered down.
“There is no justification for the government backing away from a full and immediate ban, particularly when the [banking royal] commission hearings revealed the extensive consumer harm caused by conflicted financial advice,” she said.
The Financial Services Council (FSC), which represents bank-owned superannuation funds, also said it supports an end to conflicted payments.
The Financial Planning Association didn’t respond to questions from The New Daily in time for publication.
Exceptions create ‘misaligned incentives’
In his interim report, banking royal commissioner Kenneth Hayne noted that any argument made for keeping grandfathered commissions, or providing exceptions or delays to their bans, would need to be measured against ASIC’s point that:
Any exception to the ban on conflicted remuneration, by definition, has the ability to create misaligned incentives, which can lead to inappropriate advice.”
This point, Mr Hayne said, doesn’t depend on evidence.
“It is the unchallenged [and unchallengeable] basic premise for the conflicted remuneration provisions. The grandfathering arrangements were temporary and exceptional measures,” he said.
“Once the legislative premise is accepted [and it was not challenged] the question must be ‘Why should the grandfathering provisions remain?’ The question is not, as AMP, NAB and ANZ suggested, ‘What evidence is there to warrant change?’.”
But ISA head of research and campaigns Dr Nick Coates told The New Daily the latest draft represented a “continuation” of regulators’ continued softening of commission-related legislation.
“The [initial] ban was supposed to apply from 1 July, 2013 and 2014, and then there were facilitative compliance arrangements after that, so regulators and Treasury bent over backwards for the industry on this one.”
The New Daily is owned by Industry Super Holdings