Conflicted remuneration to stay under Government ‘rebate’ proposal

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Superannuation industry bodies have strongly criticised a proposal by the Government to continue to allow conflicted remuneration, despite adopting a Banking Royal Commission recommendation.

The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommended that “grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable”.

In its response the Government agreed with the recommendation, to be effective from 1 January 2021.

However two superannuation industry bodies now say that draft legislation and regulations released by the Government would allow conflicted remuneration to remain through ‘rebate’ arrangements.

The Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 would repeal the grandfathered conflicted remuneration rules from 1 January 2021. But the explanatory materials say: “The Bill allows for regulations to be made that provide a scheme under which benefits that would otherwise have been paid as conflicted remuneration are rebated to affected retail clients.”

Both Australian Institute of Superannuation Trustees (AIST) and Industry Super Australia are concerned that this system could continue to incentivise advisers to keep consumers in products that pay commissions.

AIST says the regulations “allow product issuers to completely avoid the ban on grandfathering arrangements by setting up a rebate scheme”.

“The effect of the Regulations is to entrench the ongoing payment of grandfathered commissions.”

“Allowing product issuers to establish rebate schemes cures the mischief that consumers are out of pocket and receive no services in return. However, it entrenches the incentive for advisers to recommend that clients stay in existing, often poor performing and expensive, products.”

AIST said the rebate schemes would involved a “range of complex arrangements”, including rebates of volume-based conflicted remuneration that is ‘just and equitable’ – which AIST says is a “subjective test”.

AIST calls for a complete ban on conflicted remuneration, as this is the “only way to ensure that members’ best interests are met and that advisers are not tempted to game the system through an ill-defined and difficult to monitor rebate system”.

“Such a ban should come into effect as soon as possible. AIST recommends that the ban commence in 2020. No evidence has been given as to why continuing grandfathered commissions in any form is of benefit to consumers.”

Industry Super Australia says that consumers will be left vulnerable to “raids” on their superannuation if the rebate proposal is implemented, and that it is “completely at odds with Commissioner Hayne’s recommendation”.

“It seems that this is another example of poor decision making and a refusal to acknowledge that consumers will be negatively affected by the proposed rebate/monetary benefit scheme.”

“The weakening of consumer protection can only cause harm at both an individual and industry level.”

Like AIST, Industry Super Australia Chief Executive Bernie Dean is instead calling for conflicted remuneration to be repealed as soon as possible.

“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,” he said.

“To claim administrative inconvenience as an excuse to try and water down what should be a blanket ban on grandfathered commissions, is astounding given the disgraceful conduct that was exposed during the Royal Commission.”

“While some parts of the super sector will fight tooth and nail to keep grandfathered conflicted remuneration provisions – at the expense of consumers – our position is clear.

“We do not support a watering down of the blanket prohibition on grandfathered commissions. Any attempt to provide exemptions for conflicted remuneration will only erode consumer protections and leave consumers worse off.

Treasurer Josh Frydenberg frequently touted that the Government was “taking action” on all the recommendation of the Royal Commission, though later dropped support for a recommendation around mortgage broking.

Consultation by Treasury on the draft legislation and regulations closed on 25 April 2019. Treasury has yet to release the submissions received.

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