Commissions by Another Name

Nine ways sales incentives have been brought back to financial advice
Industry Super Australia (ISA) has identified nine ways the Government's regulations have brought back
commissions and other incentives for financial advisers to sell superannuation and other products to
While the Government is considering its response into the Senate Inquiry into ASIC and Commonwealth Bank
(which recommended a Royal Commission), it has also removed a raft of consumer protections for people
seeking financial advice.
The fine-print of the regulations reveals a range of loopholes and caveats.
"Despite assurances from the Government that the ban on conflicted remuneration will remain, ISA has
identified nine ways in which commissions, sales incentives and conflicted remuneration have come back,"
Mr Whiteley said.
"When you analyse the fine-print, it is clear that the banks' lobbying has been successful and they will once
again be able to pay incentives to financial advisers to sell their products.
"Financial advisers cannot act as impartial advisers and receive sales incentives from banks.
"Once again, people seeking financial advice will need to wary of being sold something as well", said Mr
Nine ways commissions and kickbacks have been reintroduced by the Government and banks:
1. The general advice exemption – which provides significant scope for advisers to get around the ban on
commissions and conflicted remuneration
2. Allowing commissions on execution services – a loophole to keep commissions by having a different
adviser execute or implement the advice that another adviser initially provided
3. Allowing banks to pay commissions on all basic banking products extending the already broad exemption
for basic banking products so that it applies for all staff including financial planning staff
4. Permitting ongoing asset fees indefinitely
5. Commission-based bonuses paid to bank financial advisers via 'balanced scorecards' to incentivise
product sales – only bonuses that didn't include product sales targets were allowed under FOFA
6. Extending grandfathering so commissions can be traded – advisers would continue to receive
grandfathered commissions without client approval when they move between licensees
7. Permitting commissions to be automatically transferred from a client’s super product into a new pension
product with the same provider
8. Creating an exemption for 'permissible revenue' to enable commission based bonuses to be paid
9. Allow banks to pay wholesale commissions to advisers based on volume of sales – opaque commissions
worth billions
Media contact: Rebecca Nicholson – 0409 216 053
The opinions above are those of the author in their capacity as spokesperson for Industry Super Australia (ISA). ISA, the authors and all other persons involved in the
preparation of this information are thereby not giving legal, financial or professional advice for individual persons or organisations. Consider your own objectives, financial
situation and needs before making a decision about superannuation because they are not taken into account in this information. You should consider the Product
Disclosure Statement available from individual funds before making an investment decision.
Industry Super Australia Pty Ltd ABN 72 158 563 270, Corporate Authorised Representative No. 426006 of Industry Fund Services Ltd ABN 54 007 016 195 AFSL 232514
Media Release 3/07/2014
How the FoFA changes will re-permit conflicted remuneration
David Whiteley, Chief Executive
Robbie Campo, Deputy Chief Executive
Mathew Linden, Director of Public Affairs
Commissions by another name
Check the fine print: How the FoFA changes will re-permit conflicted remuneration
Please direct questions and comments to:
The Government has announced it will proceed with watering down the Future of Financial
Advice (FoFA) laws. On 26 June new regulations were made which enact most of the
changes from July 1 2014 – effectively pre-empting the parliamentary debate on the
Robbie Campo
Deputy Chief Executive
Mobile: 0400 565 760
Much attention has been given to the Government’s recent announcement that it will
retain the ban on product commissions where general advice is provided. However, the
general advice exemption will still permit a range of other conflicted payments to be made.
The Government’s proposals will also lift the ban on a number of other incentives that can
be paid to financial advisers by banks and other product providers, including permitting
explicit commissions for execution services accompanying advice and the extension of
grandfathering on upfront and trail commissions.
Matthew Linden
Director Public Affairs
Mobile: 0407 430 613
[email protected]
This briefing is based on ISA’s analysis of the Minister’s public statements, the Bill, and the
Select Legislative Instrument 102, 2014 made on June 26, 2014.
Commissions by another name
Changes made by regulation with effect from 1 July 2014 until 31 December 2015
New carveout
ISA Analysis
Examples of kickbacks that could be paid
Allowing conflicted
remuneration to be
earned by staff giving
general financial advice.
The exemption has broad
application to advisers
and other staff working
for banks, their
subsidiaries and any
licensee selling an inhouse product. This
would permit incentives
to drive mis-selling of
complex products, given
that basic banking
products are already
completely exempt
This carveout will:
While the exemption has been revised to reaffirm the ban on explicit
product commissions this carveout will still enable incentives to be paid if
they are not 'solely' related to the sale of a financial product. This leaves
open many other types of incentives:
 Unlimited 'payments' which are not 'solely' related to the sale of the
product via general advice. For instance, payments which are based on
aggregate product sales across more than one class of product, or
payments which relate to aggregate product sales and other criteria (for
instance customer satisfaction)
 Unlimited payments which relate to the adviser getting a share of
revenue above a set revenue target also seem to be allowed
 Other unlimited benefits which are not 'payments' for instance, soft
dollar benefits, equity benefits, access to pay increases and rebates
A financial adviser works in a business development role to sell
super and other products to business and retail customers of a
bank. While the adviser does not deliver personal advice to any
clients, his job title refers to him as “Financial Adviser”. The adviser
conducts seminars and visits workplaces. The adviser has sales
targets to sell a certain number of MySuper, income stream and
insurance products per month. In addition, a premium is available
for new business and other referrals which lead to sales. If the
adviser meets certain targets in terms of annual sales, he is entitled
to a professional development trip held in Hawaii. If the adviser
meets targets over a defined period, his base rate of pay increases
and he becomes entitled to a rebate on the revenue he generates
over a certain threshold – ie. he gets a rebate of 40% of the revenue
he generates over a threshold set at 150% of his salary. The adviser
has other targets to meet in relation to customer satisfaction and
compliance but no payment/benefit is earned unless the sales
targets are met.
Allowing such incentives will cause the same bias as is caused by
commissions. Access to the bonus, benefit or other incentive will be
contingent on sales targets being met. This carveout will:
 Encourage more opaque forms of conflicted remuneration on complex
products – super products, retirement products, leveraged products
and derivative products
 Create a strong incentive to sell complex products through general
advice channels (including call centres, business development staff,
seminars and online sales as well as by financial advisers) rather than
providing tailored personal advice
 Apply even when general advice is provided by a financial adviser,
provided they are limited to working in general advice channels
(seminars, business development, business banking)
 Reduce transparency – for general advice there is no requirement to
keep records or disclose the incentives to the consumer
 Have broad application to advisers and other staff working for banks,
their subsidiaries and any licensee selling an in-house product
Commissions by another name
A managed investment scheme promotes its products, which
involve margin loan facilities, via seminars and call centres, with
‘wealth consultant’ staff who are qualified advisers but do not
provide personal advice. They are remunerated entirely on the basis
of reaching revenue targets, based on the combined amount of
product sold.
In neither situation does the adviser need to flag to customers that
they stand to gain an incentive or benefit from the
Changes made by regulation with effect from 1 July 2014 until 31 December 2015 (continued)
New carveout
ISA Analysis
Examples of kickbacks that could be paid
Allowing commissions on This carve out will:
execution services, even  Create an obvious loophole by allowing commissions and other
when personal advice has
incentives to be paid/received when advice is implemented by a
been provided to the
adviser other than the adviser who provided the advice
client by another
 Apply to complex and leveraged products including MySuper
A client obtains a financial plan from a financial adviser (who works
for a bank owned advice business) on a new super product and a
leveraged share portfolio using the bank’s margin loan facility. The
client is then referred to another person who executes the advice. A
percentage based ‘platform facilitation fee’ and ‘brokerage’ fee is
paid for the execution services. If aggregate levels of FUM are
reached with the platform, a % of total fund management fee is
rebated on a quarterly basis (‘volume rebate’).
The ‘permissible revenue’ exemption in regulation 7.7A.15 then
deems that revenue or benefits which are exempted as conflicted
remuneration can be passed on to others and remain ‘unconflicted’.
The remuneration earned on execution services could therefore be
shared within the licensee, licensee’s shareholders, staff and advisers
(including the adviser providing the initial advice) as bonus, dividend
or even as a direct pass through of the commission.
Alternatively, advisers could execute one another's advice and
become entitled to commissions, volume rebates and other
conflicted remuneration.
Allowing banks to pay
commissions on all basic
banking products
This carve out will:
Bank advisers, tellers, call centre and business development staff will
be able to earn commissions on all basic banking products even
where personal advice is provided.
Commissions by another name
Extend the already broad exemption for basic banking products so
that it applies for all staff (including financial planning staff) and
exempt all basic products including consumer credit insurance
Changes made by regulation with effect from 1 July 2014 until 31 December 2015 (continued)
New carveout
ISA Analysis
Examples of kickbacks that could be paid
Allowing ongoing asset
based fees to be paid on
an indefinite basis, even
if no ongoing advice
This carve out will:
Allow product providers, like retail super funds, to allow advisers to
deduct ongoing asset based fees which cause the same conflict and
compounded erosion as trail commissions
Enable ongoing fees to be deducted without any requirement for
ongoing advice to be provided
A bank adviser sees a client and recommends the in-house super
product which allows the deduction of a 0.5% ongoing advice fee and
a 0.5% dealer facilitation fee. Based on typical salary and super
balances, this could reduce the client’s retirement balance by around
$97,000 over their working life
Cost Australians – previous research has shown that around 3 million
Using ASIC Moneysmart superannuation calculator. (Inputs: AWOTE, 1.0%,
Australians were paying ongoing fees without receiving ongoing
year time span, starting balance $10k)
Roy Morgan (2011) Retirement Planning Report, June 2011 and ISA estimates
Changes made solely by regulation
New carveout
ISA Analysis
Examples of kickbacks that could be paid
Allowing banks to pay
This carve out will:
 Allow banks to incentivise their advisers and other staff based on
bonuses to their financial
sales volume, according to a ‘balanced scorecard’. Sales targets need
advisers via ‘balanced
to be achieved to earn any bonus and bonuses of up to 10% will be
scorecards’ to incentivise
permitted. Currently, bonuses can only be paid if they do not
product sales
influence advice provided
Commissions by another name
Permit bonuses to be paid on top of other exempted conflicted
remuneration. Banks could pay performance bonuses to all staff
including financial advisers providing personal advice on complex
products including MySuper
A bank adviser has a ‘balanced scorecard’ which sets certain targets
required to be met to earn a 10% bonus. The adviser must sell a
minimum number of products in defined categories, reach minimum
revenue targets, meet ‘new business’ targets (ie. can’t just service
existing clients), meet minimum compliance and customer
satisfaction measures. However, no bonus can be earned unless each
target is achieved – sales targets must be achieved to earn any bonus.
Changes made solely by regulation (continued)
New carveout
ISA Analysis
Examples of kickbacks that could be paid
Extending grandfathering This carve out will:
so commissions can be
 Enable advisers to continue to receive grandfathered commissions
(commissions that are allowed to continue indefinitely as they were
entered into pre-FoFA) without client approval when they move
between licensees
Result in many clients paying for grandfathered commissions despite
receiving no advice or having no ongoing contact with their adviser
Reduce individual and aggregate retirement savings as many of
these grandfathered commissions are paid from super products
Permitting commissions This carve out will:
where the client takes up  Enable grandfathered commissions on a super accumulation product
a new pension product
to automatically apply, without client approval, where a client retires
and is advised to take up a pension product with the same provider
Incentivise advisers to only recommend a pension product from the
same provider even if other products are likely to be better value
The trail commissions will apply when client assets are greatest and
therefore commission revenue maximised
Allowing commissionThis carve out will:
based bonuses to be paid  Allow conflicted remuneration payments to advisers that would
on ‘permissible revenue’
otherwise breach the conflicted remuneration prohibition – i.e.
commissions earned for ‘execution’ services could be passed to other
Commissions by another name
Allow Grandfathered revenue received by a dealer group (for
instance volume rebates) to be passed to new advisers
An adviser works for XYZ, a financial institution which produces a
range of investment, super and insurance products. They have a trail
book of C & D clients that generates a stream of income for the
adviser, but the clients are largely passive. The adviser wants to
change licensees, and this exemption will allow them to take the book
with them. Alternatively, if the adviser wants to sell the book to
another adviser, this exemption will facilitate the sale of the book to
XYZ or to another adviser. Alternatively, if the adviser leaves the
industry, XYZ inherits the ‘orphaned’ commissions which it can retain
or on-sell to other advisers who buy the income stream it generates.
A client seeks retirement advice from their adviser. The client’s super
has remained in an ABC retail superannuation product which pays a
0.5% commission to the adviser, as well as a volume rebate based on
aggregate client FUM to the adviser’s licensee. Under this
grandfathering, the client can be placed in ABC’s pension product and
the commission will be grandfathered. The adviser has obtained the
client’s “agreement” at the outset that they will only consider ABC’s
pension products. The trail commission alone is worth $1,750 a year
for a client with $350,000 of super placed into a pension product.
A planning business has an execution arm which implements advice
and is able to generate commission and volume rebate income. As
these benefits are received by a representative who has not provided
the personal advice to clients, they are exempt as conflicted
remuneration. The revenue is paid into a pool which funds a bonus
scheme for advisers.
Changes made through amendment to the Corporations Act
New carveout
ISA Analysis
Examples of kickbacks that could be paid
Allowing banks to pay
This carve out will:
wholesale commissions to  Re-allow these wholesale commissions to be passed on to advisers.
advisers based on sales
Volume rebates are a significant and opaque wholesale commission
volume (volume rebates)
worth billions of dollars per year to advisers and advice businesses
Commissions by another name
XYZ dealer group recommends products via an arrangement with a
platform operated by QWERTY Wealth. QWERTY has ‘white-labelled’
the platform which is promoted as XYZ Platform. Based on the
amount of FUM placed in QWERTY’s platform, XYZ becomes entitled
to a ‘scale efficiency’ rebate on fund management fees based on
reaching certain FUM targets. QWERTY ask XYZ to provide assurances
that the payment of the rebate does not influence the advice
provided. The rebate forms part of XYZ’s profitability which flows
through to dividends for the shareholders, who are advisers in XYZ’s
advice business.