Closing the Conflicted Remuneration Loophole
Reports today in the Financial Review indicate that ASIC is targeting the loophole in the conflicted remuneration laws that allowed financial advisers to receive commissions on listed funds.
Firstly, the loophole relates to listed investment companies (LICs) and listed investment trusts (LITs). Under the Future of Financial Advice (FOFA) commissions were generally banned for the recommendation of financial products. However, FOFA does not generally apply to wholesale investors or to the issuing of shares, bonds or hybrid listed products.
Perhaps due to this exception the amount of funds under management in LICs/LITs has doubled to $45 billion since 2014 when the Abbott government granted the exception for commissions on listed securities. An adviser can earn a commission of between 1 and 3 per cent on these products.
An ASIC spokesperson said:
“It is a matter for government whether those exemptions still applying remain so. No doubt they will be considering, among other things, the royal commission recommendation. The review referred to in recommendation 2.3 should also consider each remaining exemption to the ban on conflicted remuneration remains justified.”
It appears that some advisers have reported the aggressive pushing of LICs and LITs by their colleagues that has lead to the concern around their use.
There are a range of additional conflicted remuneration areas that advisers can expect to see targeted progressively over the next few years.
Recommendation 2.3 in the Royal Commission report recommended that all the exemptions for conflicted remuneration be reviewed with a view to them being removed unless there was a clear justification for their retention. This was justified as a measure to improve the quality of financial advice.
The Final Report from the Royal Commission also had the following to say:
“Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable.”
Life risk insurance commissions
“When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero. “
General insurance and consumer credit insurance commissions
“The review referred to in Recommendation 2.3 should also consider whether each remaining exemption to the ban on conflicted remuneration remains justified, including:
the exemptions for general insurance products and consumer credit insurance products; and
the exemptions for non-monetary benefits set out in section 963C of the Corporations Act.”
Advisers that have a significant portion of their income derived from any of the above sources should now be planning how they will adjust their businesses if a ban to any of the above implemented.
It appears that each area will be targeting separately so that the remaining areas of conflicted remuneration are removed individually rather than in one swoop.