The long lucrative trail of grandfathered investment commissions will end in January 2021 under new legislation introduced by the Australian government last week.
In a release, Australian Treasurer Josh Frydenberg, said the proposed law would “benefit retail clients, as they will receive higher quality advice and stop paying higher fees to fund grandfathered conflicted remuneration”.
Frydenberg said the new bill is part of the Australian government commitment to act on all 76 recommendations flowing out of the Royal Commission (RC) into financial services report published this February.
The RC identified grandfathered commissions as a major source of conflict in the Australian advice industry, underpinning a widespread practice of ‘fees for no service’.
Australia banned investment product commission in 2013 under the Future of Financial Advice (FOFA) legislation but allowed existing arrangements to continue with the grandfathering carve-out.
While the RC did not quantify the scale of grandfathered commissions across the industry, it did flush out a few individual company estimates.
For example, the now-departed AMP head of advice and NZ, Jack Regan, told the RC last April that grandfathered commissions still represented about 70 per cent of the group’s advice income.
According to Frydenberg, the new government bill would go beyond the RC recommendation to include “a power to make regulations to establish a scheme that will provide that those people paying conflicted remuneration rebate clients for any remuneration that would be paid after 1 January 2021”.
“To ensure that the benefits of industry renegotiating current arrangements to remove grandfathered conflicted remuneration ahead of 1 January 2021 flow through to clients, the Government has commissioned [Australian Securities and Investments Commission] ASIC to monitor and report on the extent to which product issuers are acting to end the grandfathering of conflicted remuneration,” he said in the statement.
ASIC is pretty busy as it is.
Last week the regulator – which has taken a notably tougher line since the RC – put a stop to new exchange-traded fund (ETF) listings that don’t disclose daily holdings and use “internal market makers”.
The product launch ‘pause’ essentially applies to so-called active ETFs while ASIC reviews the sector over the rest of 2019.
“Existing actively managed exchange traded managed funds are not impacted. There is also no impact on other investment products that do not use internal market makers or on warrant products,” ASIC says in a release.
Actively-managed products represent about 6 per cent of the A$50 billion plus Australian ETF market.
In the statement, ASIC says the active ETF hiatus and planned sector review reflect a number of material changes in the market, including:
- substantial recent market growth in actively managed funds;
- continued innovation in fund structures and investment strategies among actively managed fund proposals, particularly those with internal market making;
- changes to the composition of market makers for exchange traded managed funds and the nature of the pricing models they use; and,
- recent international developments, including regulatory approval in the United States and Hong Kong of alternative frameworks.
ASIC would also investigate the Australian listed investment company (LIC) sector in a bid to close down another FOFA loophole, local media reported.
According to the Australian Financial Review, Frydenberg has asked Treasury and ASIC to review the LIC sector following allegations advisers are using the products to by-pass the anti-commission laws.
LICs, which unlike ETFs are closed-ended listed funds, pay brokerage fees that fall outside the commission regulations. The Australian LIC market has grown rapidly over the last decade to reach about A$45 billion spread across more than 110 funds.
Many ASX-listed LICs are also popular in the NZ market, especially among share broking firms.