Finance industry experts have spotted a major drafting problem in the government's regulations repealing the Future of Financial Advice consumer protections that will enable conflicted remuneration to be paid to financial planners even in circumstances where the government claims it is prohibited. The Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 was made by the government last week as part of what looks like a futile attempt by the government to slide its repeal of FOFA through via regulation. It is expected that the regulation, intended to remove consumer protections in favour of financial planners and retail funds run by the big banks and AMP, will be disallowed by the Senate as soon as it is tabled by the government. Disallowance appears all the more important after a major flaw was spotted by industry experts, relating to the controversial issue of conflicted remuneration. The government reflexively insists that its repeal leaves intact FOFA's prohibition on payments that encourage planners to direct clients into products that reward planners, although the repeal establishes a number of carve-outs. However, a possibly unintentional effect of one carve-out is to legitimise a form of conflicted remuneration for planners that is based on payments to another body. Last week's regulation has an entirely new section that amends paragraph 7.7A.12J of the FOFA regulations in relation to "Benefits calculated by reference to another benefit", which reads:
"A benefit is not conflicted remuneration to the extent that the amount or value of the benefit is calculated by reference to another benefit that is not conflicted remuneration because of section 963B, 963C or 963D."
Those are the sections of the Corporations Act that exempt payments from being defined as conflicted remuneration. The effect of the provision is to allow an individual financial planner to receive a benefit from a platform product provider -- such as one of the big banks -- for directing clients into the platform product as long as it is calculated by reference to a benefit that has been given to another body, such as the licensee employing the planner as an authorised representative. The result: the exemptions under the Corporations Act in effect wash conflicted remuneration clean as long as that remuneration is calculated in reference to exempted payments, allowing individual planners to receive benefits as long as they are calculated by reference to, for example, a dealer fee by a platform product provider to a licensee.
"... the government's regulation has simply codified a wide variety of straightforward means by which the big banks can continue to reward financial planners for directing people into their products ..."
The explanatory memorandum refers to the new section as providing that the "'reference benefit' must be a benefit that is not conflicted remuneration because of section 963B, section 963C or section 963D of the Act". The problem appears to be that "calculated by reference to" opens the door much wider, to any form of conflicted remuneration as long as it can be tenuously linked to exempt remuneration. This isn't the first time unclear drafting has plagued the FOFA process: in late 2012, Crikey revealed a flaw in regulations relating to the grandfathering of current arrangements that the then-government moved quickly to repair. The apparent flaw is similar to another spotted by Industry Super Australia in a report released overnight. The ISA report shows that financial planning groups can evade the restriction on conflicted remuneration as long as a planner other than the original adviser "executes" the advice agreed to by a client and receives the remuneration (and, potentially, shares it with the rest of the group). The report also shows:
  • the "general advice" exemption as currently drafted allows financial planners to be remunerated based on sales targets for selling certain products, as long as they don't provide "personal advice";
  • conflicted remuneration in the form of performance bonuses can be paid to planners as long as the bonus "is low in proportion to the individual’s total remuneration" and in calculating the bonus, the weighting attributed to sales of products is "outweighed or balanced by the weighting attributed to other matters" -- that is, a bonus can be paid to a financial planner based on sales of products as long as sales only forms 49.9% of the weighting of how the bonus is calculated; it also allows bonuses that are only paid if product sales targets are met.
Those problems are in addition to the regulations removing the requirement for planners to get clients' agreement to fees, and the removing the prohibition on volume rebates, which are conflicted remuneration under another name. The net result is that, far from ending conflicted remuneration, the government's regulation has simply codified a wide variety of straightforward means by which the big banks can continue to reward financial planners for directing people into their products regardless of whether they're the best option for clients. And as Crikey tipped yesterday, the Commonwealth Bank has this morning announced a major national campaign to begin the process of re-establishing the credibility of its financial planning arm. CEO Ian Narev this morning apologised for the Commonwealth Financial Planning debacle and said all potential victims who were CFP customers between 2003 and 2012 could participate in a new compensation process involving an independent panel whose decisions the bank would be bound by. It remains to be seen whether the campaign will be sufficient to take the heat off the CBA or the government, which has been embarrassed by such a blatant demonstration of why its FOFA repeal is such a bad idea.