Grandfathered commission paid to financial advisers should cease "as soon as reasonably practical", says ASIC.
In a submission to the royal commission, ASIC has made the case for banning 'grandfathering' commission payments made to advisers as a result of arrangements entered into prior to the Future of Financial Advice (FOFA) start date of 1 July 2013.
The FOFA legislation banned commissions within investment and superannuation arrangements entered into after 1 July 2013, although existing arrangements were retained or 'grandfathered'.
"ASIC is concerned that almost five years after the implementation of the FOFA reforms, grandfathered commissions continue to form a significant proportion of licensee/adviser remuneration," said the submission.
The regulator pointed to evidence given by AMP head of advice Jack Regan which indicated that the majority of revenue being paid to planners in the AMP network is derived from grandfathered commissions.
"Grandfathered commissions operate to incentivise advisers to keep clients in legacy products with a continuing commission structure, even where there may be better products available to meet the client’s needs," said ASIC.
"Accordingly, ASIC believes that the grandfathering of commissions should cease as soon as reasonably practicable and to the maximum possible extent," said the submission – allowing for a "short transition period" to allow licensees and advisers to "adjust their businesses".
Of the four major banks' submissions to the royal commission, only NAB's countenanced the removal of grandfathered commissions.
"NAB does not oppose in principle the cessation of grandfathered commissions , but it considers that any such cessation should be subject to a reasonable further sunset period," said NAB's submission.
AMP was strident in its opposition to the move, which is unsurprising given Mr Regan's evidence and the likely effect on the company's revenue.
AMP said the pre-existing trail commissions were retained at the time after it was determined the FOFA reforms should be "forward facing" and the government would run into "constitutional issues" if it attempted to alter pre-existing contracts.
A further argument is that grandfathering will gradually reduce as customers are transitioned into post-FOFA arrangements.
"AMP considers that these reasons remain compelling and that the grandfathering arrangements provided for in the FoFA arrangements should remain in place," said the AMP submission.
"AMP is of the view that safeguards implemented at the transition points create a robust framework ... and when coupled with an equally robust monitoring and supervision framework will ensure customers’ interests are protected," said the submission.
The Financial Planning Association submission recommended that grandfathered commissions on super and investment advice should be "phased out over a three-year period".
The Association of Financial Advisers said: "We do not believe that there are grounds to cease grandfathered commissions, although we note that more can be done to ensure that these clients are being serviced."
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