Although the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry wrapped up last year, implementation of some of the recommendations from the commission are being rolled out over the next few years. One of those recommendations was to end the payment of grandfathered commissions to financial advisers for the sale of certain financial products, including superannuation. Laws have now been passed to end these commissions by 2021, so how will this impact consumers?
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To gain a better understanding of grandfathered commissions, we detail below the history behind conflicted remuneration in Australia, the grandfathering system and what this change could mean for the future of superannuation.
What are grandfathered commissions?
‘Grandfathered commissions’ is the term given to ongoing commissions paid to financial advisors by companies for helping them sell and set up super, investment and insurance accounts for clients with their company. In 2012, the Federal Government opted to ban the payment of these commissions – called conflicted remuneration – to financial advisors, but was faced with the decision of when to apply the ban. A grandfathering system was established for financial accounts, including super, set up before July 2013, meaning financial advisors would continue to receive these commissions indefinitely.
In the legal context, grandfathering is where an arrangement put in place prior to when a new law was made is exempt from having to abide by the new law, either at all or for a certain period of time. Grandfathering allows those that are subject to the law the time to adjust to new legal requirements and results in a gradual ‘phasing out’ of the old law. In this case, super, investment and insurance accounts established prior to 1 July 2013 were not subject to the laws banning conflicted remuneration.
How do grandfathered commissions work in superannuation?
Financial advisors charge for their services in a number of ways. One common way is through charging a commission on the products they sell. Prior to July 2013, this often included superannuation accounts. Super funds would reward the financial advisor for setting up new accounts by paying them a commission fee. These fees were typically built into a new member’s total account fees and classified as ‘distribution costs’. This means that members would effectively be paying these commissions straight from their super balance as they would for other fees within their super. Even if a fund member did not obtain further advice from their financial advisor these commission fees would still be charged within their superannuation accounts on an ongoing basis.
This type of arrangement was met with criticism by the government, with the main concern being that there was a large risk a conflict of interest would arise because financial advisors were incentivised to sell certain super accounts to their clients. In many cases, these fees also rewarded financial advisors for keeping clients with the same super fund.
The ban on conflicted remuneration
In 2013, the Federal Government legislated a ban on conflicted remuneration. A key part of this law involved the prohibition of commissions being paid to financial advisors by superannuation funds.
Section 963A of the Corporations Act 2001 (Cth) clarified that conflicted remuneration “referred to any benefit given to a financial services licensee” which could be reasonably expected to either influence the choice or advice given in relation to a financial product. The rationale for this move was clear – no commission would mean no monetary incentive for financial advisors to sell certain superannuation accounts over others. Financial advisors, when advising on super accounts, would also have to ask clients every two years if they consented to continuing fees (which would be passed on as commissions to the advisors) for their services.
However, there was disagreement amongst the Government and financial services sector as to when this ban would apply. Many super accounts prior to 2013 had been set up with the commissions in place, potentially causing a big headache for many advisors and companies if they had to revert to a different structure immediately. Subsequently, the ban on conflicted remuneration was implemented with grandfathering provisions in place for commissions established prior to the ban.
Grandfathering and the royal commission
The ban on conflicted remuneration had been implemented several years earlier, but when the banking royal commission commenced in 2017, the superannuation industry once again became a focal point of enquiry.
The final report included recommendations that the grandfathering provisions introduced in 2013 be abolished, as they provided advisors with an incentive to keep clients in products with grandfathered commissions rather than more suitable products.
What’s the discussion now?
Last year, treasurer Josh Frydenberg accepted the royal commission’s recommendation, and Parliament subsequently passed a new law to confirm that grandfathered commissions in super that had been paid since the pre-2013 ban would end on 1 January, 2021. Also included in the legislation is a requirement for clients to receive rebates for conflicted remuneration fees that are charged after the deadline.
Mr Frydenberg said the Government’s reform would help to benefit retail clients as they will receive “higher-quality advice and stop paying higher fees to fund grandfathered conflicted remuneration”.
The Association of Superannuation Funds of Australia (ASFA) has been swift to support the planned ban of these commissions and said it would “facilitate superannuation businesses transferring members to more modern products, in their best interests”.
CEO of the Association of Financial Advisers (AFA), Philip Kewin, said that while AFA acknowledges the removal of these commissions as a necessary step in the journey towards professionalism and building consumer trust in financial advice, the association is concerned with the limited timeframe to deal with the removal of these fees and lack of guidance for impacted advisers.
“In many thousands of cases there is a genuine risk that clients who are happy with their current product and receiving valuable ongoing financial advice and related services will either lose access to that support or be required to pay more to retain it,” Mr Kewin said in a statement.
The AFA asked that a three-year transition be put in place to implement the changes and that a provision be included for exemptions where the existing product is best suited to the client or the client may be disadvantaged by changing their current superannuation product.
What will the end of conflicted remuneration mean for consumers?
After conflicted remuneration in super ends for good, clients will have to pay for their financial advisors’ services separately (and not from commissions charged within their super balance). Some of those in the financial services industry have raised concerns that this change may potentially strip older Australians (who are the main holders of grandfathered superannuation accounts) of their access to advice as they may not be willing to pay for it directly out of pocket. Industry players have also warned that ending commissions could push up the price of financial advice, making it more expensive for those who already have an adviser and less accessible for those who don’t.
While there are some in the financial services industry voicing concerns with the changes, many have also supported the end to these commissions, including the Financial Services Council (FSC). Chief executive of the FSC, Sally Loane, told the AFR that any conflicted remuneration payable under a contract should be passed on to the consumer “as soon as reasonably possible”, but said the government should take be mindful of any unintended consequences, including any “implications for customers receiving additional payments which may affect social security entitlements”.
What should consumers look out for?
Although commissions will no longer be paid to financial advisors on any superannuation products from 1 January, 2021 onwards, it’s important for super fund members who choose to keep receiving financial advice on their account to understand how their adviser is being paid. If it is an upfront ongoing fee, Moneysmart said consumers should ask for a fee disclosure statement (FDS) from their adviser every 12 months. With this statement consumers can check the exact fee amounts being charged and if the adviser did everything they charged for.
If you are unsure whether your super account, set up prior to 2013, has been impacted by grandfathered commissions, it may be a good idea to reach out to your fund directly to discuss any concerns. You may also want to take the time to check what fees are currently being deducted from your super balance, to make sure you’re aware of what these fees are paying for and if you are happy with how much is being taken out.
If you are concerned you are paying too much in fees, then you may want to consider comparing other super funds on the market to see if there is one that may better suit your needs and budget.
Cover image source: Maksim Labkousky (Shutterstock)
About Jackie Olling
Jacqueline Olling is the Senior Content Marketing Manager at Lawpath. She has a Bachelor’s Degree in Law and Politics (International Relations) and is a solicitor in NSW. She has over six years’ experience in law, including at Goldsmiths Lawyers. She’s interested in legal technology and how policy-making can reflect modern attitudes towards innovation. You can follow her on LinkedIn.