ASIC report reveals impact of commission ban

ASIC’s report on ending grandfathered conflicted remuneration, released on Friday, revealed the extent of pre-FOFA grandfathering arrangements in the advice sector and the impact on the industry from the banning of these arrangements on 1 January 2021.

The report used data from the top 10 advice licensees and 93 product issuers to assess the level of grandfathered commissions being paid in the 2019 financial year, in the 2020 calendar year leading up to the ban on commissions, and finally after the ban in January 2021.

Product issuers had paid around $816 million in grandfathered commission revenue to licensees and representatives in the 2019 financial year, not including exempted remuneration such as risk commissions. In the 2020 calendar year, this dropped to approximately $760 million.

The report showed that the vast majority of product providers – 66 per cent – terminated their grandfathered remuneration agreements with licensees during the last quarter of 2020, with 11 per cent terminating agreements in the third quarter and 12 per cent in the second quarter of the calendar year.

Just 4 per cent of agreements among eight product issuers were not terminated by the 1 January 2021 deadline, with customer rebates still to occur across the 46 products concerned.

“These eight product issuers estimate that they will rebate $24.4 million to product holders in the 2021 calendar year,” ASIC said.

“The eight product issuers indicated that for two thirds of their products (67 per cent) rebates would occur by fee reductions. The next most popular method was a direct payment to product holders (17 per cent of products).”

The report also collected data from the FPA and AFA around the economic impact of the changes on advisers and how they had adjusted their business models as a result. FPA data indicated that 93 per cent of the association’s members were using grandfathered commissions to fund an ongoing advice relationship with their clients.

Around half of FPA members said they had transitioned commission clients to an alternative fee arrangement after 1 January, with the remainder having stopped providing advice to these clients. About 25 per cent of commission clients among AFA members had been transitioned to an alternative fee arrangement, with the rest either serviced on a one-off or pro-bono basis, or no longer a client.

“Surveyed AFA members generally focused on moving their higher value clients to ongoing fee arrangements,” the report said.

“Some AFA members have moved their lower value clients onto ongoing fee arrangements. However, they consider that this is not a sustainable position.”