In brief 6 min read
As 2019 draws to a close, it is almost 6½ years since the ban on conflicted remuneration commenced, and a little over 12 months until the grandfathering of said remuneration ends. Senior Regulatory Counsel Michael Mathieson reports.
The ban on conflicted remuneration has always tended to focus attention on matters of detail. Early on, the questions were: 'What arrangement is this benefit given under?' and 'Is this benefit given by a platform operator?' - and, for some, 'What on Earth is a platform operator?'. Later, the question became, 'Does this benefit relate to the acquisition of a financial product before 1 July 2014?'. And, most recently, the question has become, 'How do I rebate, to a group of investors, a grandfathered volume bonus payable to a dealer group where the bonus is calculated by applying tiered rates to funds under management?'. Ah, FoFA, the headaches you have caused.
This focus on matters of detail made it easy to lose sight of the bigger picture (pardon the cliché). Commissioner Hayne and Counsel Assisting put a stop to that. With clear eyes, they got to the heart of the matter in no time at all. The Commissioner set out, in plain language, the point of principle and the way in which the myriad exceptions to the ban (including grandfathering itself) compromised it. On the 'constitutional invalidity' argument, the Commissioner expressed himself in terms, and with brevity, that did not exactly mask his disdain.
And so, as conflicted remuneration relating to financial products (excluding, ahem, many forms of life insurance) enters the home strait in the race of life, I would like to offer a few bigger picture (sorry, again) points of my own.
The first is that, long before FoFA became a twinkle in the eye of the Global Financial Crisis, there was already a ban of sorts on conflicted remuneration. Many financial advisers were fiduciaries because they had undertaken to act in the interests of their clients. As fiduciaries they were banned by the general law from profiting from their position without their clients' fully informed consent. Now, I accept that the adviser's entitlement to a commission was invariably disclosed (in print, fine or otherwise) in an offer document given to the client. But it is also likely that, in at least some cases, the client's fully informed consent was not successfully obtained. I apologise if this point is obvious to the reader, although the older I get the less confident I am that what seems obvious is in fact obvious.
My second point is that, over the years, organisations affected by the ban, and ASIC, have not focussed very much on the core element of the ban – the influence test. The test is simple to state: is this benefit, given in these circumstances, likely to influence financial product advice given to retail clients? I can easily accept that the test can be hard to apply. It takes effort. You have to gather facts, and (heaven forbid) think. You also have to accept that exactly the same benefit might be conflicted remuneration in one set of circumstances, but not in a similar but different set of circumstances.
In this way, the ban on conflicted remuneration is a risk and compliance manager's worst nightmare (oh, for a 'bright line' rule). And FoFA lawyers who have been doing work resulting from the expanded ban on treating employers in section 68A of the SIS Act could be forgiven for experiencing a little PTSD.
So this tendency to focus on matters other than the influence test (grandfathering, anyone?) is understandable, but it is also unsatisfying and, ultimately, strange. Because, more often than not, when effort is applied, and the influence analysis undertaken, the benefit turns out not to be conflicted remuneration in the first place. Some readers may grumble that I have said this before, but an ongoing investment commission, where the adviser has 'moved on' from the client, just cannot be conflicted remuneration, as defined.
My third and final point explains the title of this article. And it is not really my point, it is the point made, as astutely as ever, by my colleague Michelle in her introduction to this edition of Unravelled. That is, the Parliament has before it a Bill that contains many pages of provisions concerning conflicted remuneration in relation to credit products – but, it does not contain any ban. Any ban is to be made by regulation and the Government's position on banning commissions for mortgage brokers is well known. It makes me think of someone who is not a police officer walking around in a police officer's uniform – at best, confusing and at worst, misleading. So, goodbye, conflicted remuneration – and hello, conflicted remuneration!