Royal Commissioner Kenneth Hayne raised eyebrows when, in his final report released last month, he took aim at the way some financial professionals like mortgage brokers get paid.
An effective lobbying campaign from the broking industry saw both sides of politics eventually side with them, conceding that outlawing commissions paid by lenders to brokers would just hand more power to the big banks.
Now, financial advisers are mounting a similar defence, arguing that the royal commission’s recommendations to ban so-called “grandfathered” investment commissions is not in the public interest.
In a memo to members obtained by YourMoney.com.au, the Association of Independently Owned Financial Professionals (AIOFP) – a lobby group which represents financial advisers who aren’t linked to the banks – said it is up for the “fight”.
“The [banks] have cleverly spun grandfathered revenue into a fictitious story that the monies are sourced directly from consumers and it be returned to them. [That’s] total trash,” AIOFP executive director Peter Johnston wrote.
“This is yet again another attempt by the institutional lobby to starve advisers out of the industry. This time they have gone too far.”
Getting to know Grandfather
In 2012, the Rudd-Gillard-Rudd Labor government introduced the Future of Financial Advice (FOFA) laws which banned investment commissions, meaning fund managers and super funds could no longer pay advisers directly and clients would need to fork out a fee-for-service (just like the royal commission recommended for brokers).
But the financial advice industry was granted a lifeline, with FOFA providing an exemption whereby it could continue to collect ongoing trail commissions for client work completed prior to the introduction of the new laws.
Or, in other words, the revenue was protected or “grandfathered”.
That was until the royal commission concluded that this loophole should be repealed “as soon as reasonably practical” – a recommendation the government has given verbal support to.
But the AIOFP disputes the characterisation of grandfathered commissions by the royal commission as “fees for no service”. Instead, it says these payments subsidise the operating costs for a financial advice business allowing it to reduce fees for consumers.
Outlawing these payments would just allow the big banks and other financial product manufacturers to pocket the money instead of passing it on to the independent small businesses that advise the public, pushing the cost of advice up in the process, it says.
In this way, the lobby group has taken a page out of the mortgage broker playbook, presenting the royal commission’s finding as perversely resulting in concentration of power by the banks.
But it isn’t stopping there, drawing inspiration from a legal precedent most Australians know well.
It’s the vibe
Having received advice from a blue chip corporate law firm, the association says outlawing grandfathered commissions would not just hand more power to the banks, it might even be unconstitutional.
“Since 2011, the constitutional restrictions on the acquisition of property (other than on just terms) have not changed,” the memo explained.
Of all the phrases in the common law, that one may be familiar.
It is the same defence that the QC played by Bud Tingwell successfully ran for the Kerrigan family in much-loved Australian film The Castle, after the authorities threatened to re-possess their home for a proposed expansion of Melbourne airport.
Luckily for the AIOFP, they have a source arguably more authoritative – if much less popular – than a fictional feature film.
Bill Shorten himself – who was a major advocate for the FOFA reforms as minister for financial services – has said that outlawing grandfathered commissions could be problematic.
“The proposal to ban particular remuneration structures can only operate prospectively, due to constitutional restrictions concerning acquisition of property,” Shorten wrote in an explanatory memorandum on FOFA circulated in 2011.
Given that he now leads a political party that has vowed to implement the recommendation to ban grandfathered commissions, the sentence may come back to haunt him.
The Opposition would likely not relish an opportunity for yet another embarrassing backdown, as it was forced into on mortgage broker remuneration.
Emboldened by the discovery of Shorten’s words and the legal advice it has received, the AIOFP has vowed to take its challenge as far as the High Court of Australia if need be – a campaign that could cost over $1 million.
The development suggests that despite both major parties seeking to close the chapter on the royal commission, the lobbying and litigation that has come with reform in financial services over the past decade will likely continue.
And, if nothing else, it could be an opportunity to bring Dennis Denuto out of retirement.