Carve-outs must be addressed before commissions: AIOFP

Anomalies caused by legislative exceptions to remuneration within vertically integrated businesses and SMSF structures should be a higher priority for policy makers than grandfathered commissions, according to the AIOFP.

Last week, ASIC deputy commissioner Peter Kell and counsel assisting the royal commission Michael Hodge both flagged concerns with the grandfathering of commissions, with Mr Kell describing the provisions for grandfathering as “extremely expansive” in terms of both the circumstances allowing for grandfathering and the time period for which it remains permissible.

“Leaving aside the legal test, grandfathering – the entire provision is not in the interests of consumers. The Parliament has, in effect, put in place a provision that enables the continuing payment of commissions that generate conflicts of interest and unnecessary costs widely across the financial system,” he said.

“I think for the interests of consumers in the financial system as a whole, it would be highly desirable to have this dealt with at a policy level.”

Responding to ifa’s questions regarding the comments from both Mr Kell and Mr Hodge, AIOFP executive director Peter Johnston, however, said policymakers should be focusing on carve-outs for vertically integrated businesses and SMSF structures before looking to make changes to grandfathering arrangements.

“The political lobbying around FOFA totally compromised the objectives of the legislation where vertical integration and SMSF structure effectively received carve-out from the conflicts of interest aspect of the legislation,” Mr Johnston said.

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“This created a massive unlevel playing field where institutionally aligned and SMSF advisers could receive cross subsidisation benefits from their activities whilst independently owned practices who operated their own AFSL and did not deal in SMSFs, could not.”

Mr Johnston added that while the current grandfathering arrangements are not perfect, “we don’t have a perfect market” either, and that removing grandfathered commissions may result in detrimental outcomes to some clients.

“Trying to unravel some client product structures will be a distinct disadvantage to consumers, rendering a blanket ban impractical and not in the best interests of some consumers,” he said.

“Putting aside contractual obligations around grandfathering arrangements, once these two ‘anomalies’ of vertical integration and SMSFs are addressed then, and only then, should grandfathered revenue be addressed.”

Responding to the same questions, the AFA’s general manager of policy and professionalism, Phil Anderson, said it “has previously made its position on grandfathering public”, noting that the majority of the most recent round of hearings focused on corporate superannuation.

“We have until 25 September to respond to the questions raised at the recent hearings and will respond accordingly,” he said.

The FPA were unable to meet ifa’s deadline for responses.

Carve-outs must be addressed before commissions: AIOFP
AIOFP, SMSF, FOFA, vertical integration, grandfathered commission, ASIC, Peter Kell, Royal Commission, Michael Hodge, Kenneth Hayne, Ken Hayne, AIOF, AFA, FPA
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