Commission questions to be asked

Possible restrictions on adviser commissions are likely to be considered as part of the Financial Advisers Act review next year, legal experts say.

Tuesday, October 21st 2014, 6:00AM 3 Comments

by Susan Edmunds

Commissions have been a hot topic in Australia this month after the Australian regulator, ASIC, put out a report critical of life insurance advice.

It reviewed adviser files and found many were problematic. It said advice was particularly poor where there were high upfront commissions and that advisers seeking commission might be seen to be prioritising their own desire to earn income over their clients’ needs.

The country’s FOFA reforms had previously moved to ban commissions and conflicted remuneration for financial advisers. But that has since been amended to exclude personal advice on general insurance products from brokers and banking staff.

New Zealand’s Financial Advisers Act is due to be reviewed next year and the issue of commission is believed to be on the agenda.

Jeremy Muir, of Minter Ellison Rudd Watts, said it was likely that it would be discussed but he said it should not be assumed that a ban was imminent.

“We have not come across any appetite either from industry participants or regulators to follow Australia's path in terms of banning commissions. It's notable that the Australian position is not settled and has been travelling backwards from what was originally enacted.”

Bradley Kidd, of Chapman Tripp, said it was a tricky issue. He said one end of the spectrum of solutions available to regulators was a complete ban on commission on certain types of products.

But he said that would have consequences and could drive a segment of the adviser market out of business. “Less advice would be provided. But if you look at the spectrum of options, that’s one.”

He said the review would have to tread carefully and balance advisers in one camp and consumer protection groups in another.

Kidd said it was an opportunity for the industry to get involved in refining the legislation. “It’s an opportunity to air things and get a debate going.”

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Comments from our readers

On 21 October 2014 at 9:40 am Pragmatic said:

Like most things that are considered, the consumer reaction is unlikely to be taken into account.

It’s less about fees versus commissions and more about an explicit arrangement and understanding between the consumer and their financial adviser, which will vary depending on what works for both parties

Consumers really don’t care how they pay, whether it’s explicit fee from out of their product, a separate fee for service, or a pay-as-you-go charge from their product. What they do care about is exactly how much they are going to have to pay and what services they are getting for that price

On 21 October 2014 at 2:37 pm Mike Naylor said:

The commissions in Australia on personal risk insurance are around 115% of initial premium- already well below NZ levels. Since the ASIC report did find indirect evidence that the level of commission adversely impacts on advice, the FMA will definitely look at this issue. A complete ban is very unlikely however.
As I have noted previously, if regulation of commission involves lower upfronts and higher trails then adviser income will not change. One of the main ASIC findings was a jump in policy transfers immediately after the claw-back period had ended. As a counter to this long trails would be needed.
The adviser associations need clearly address this issue with the FMA, so changes do not act as a disincentive.

On 21 October 2014 at 5:00 pm macca said:

I feel that all risk commission/bonuses payable should be disclosed in dollar terms, and in the event of replacement business the additioanal commission received in comparison with previuosly received renewal commission needs to be fully disclosed to the client and justified. This will help to resolve the issue of "...own desire to earn income over their clients’ needs".

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