QAR draft law: Conflicted remuneration explained

The exclusion of statements of advice (SOAs) from the first round of draft legislation has garnered the most attention among the advice industry; however; the proposed law includes measures that will clarify the rules around conflicted remuneration and the addition of one-off consent forms for commissions from life insurance.

Recommendations 13.1 to 13.5 from the Quality of Advice Review (QAR) final report, which were previously accepted as part of the government’s response in June, relate to clarifying the rules around conflicted remuneration and the removal of exceptions within the Corporations Act that would no longer be necessary.

According to the explanatory memorandum that accompanied the draft legislation published on Tuesday, the main purpose of these amendments is to clarify that conflicted remuneration relates to benefits provided by product issuers to financial advisers, not those given by a client.

The explanatory memorandum said: “The new definition builds on the former one, so that conflicted remuneration means:

• any benefit (monetary or not) that is given to a financial services licensee or representative of a financial services licensee, who provides financial product advice to retail clients; and
• that because of the benefit, could reasonably be expected to influence the recommendation or the advice given by the licensee or their representative to the retail client;
• but the benefit is not given or paid by a retail client (or on their behalf) to the licensee or their representative for financial product advice received by that client.”

The effect of amending the Corporations Act to remove any ambiguity on the source of conflicted remuneration results in a streamlining of the act, with a number of exemptions able to be removed as they will no longer be necessary to allow, for example, clients to pay for financial advice through their superannuation account where it relates to their interest in the fund.

Recommendations 13.7 to 13.9 relate to obtaining consent for life insurance, general insurance, and consumer credit insurance commissions. The draft legislation would retain all of the current caps on commissions, such as the 60 per cent upfront commissions and 20 per cent trailing commissions, with a two-year clawback for life insurance.

In relation to life insurance advice, the consent will be one-off and apply for the duration of the policy.

According to the explanatory memorandum, in order for the client to make an informed decision, the advice provider must disclose both the commission the person will receive (upfront commission and trail commission) as a per cent of the premium and the nature of any services the adviser will provide to the client (if any) in relation to the life risk insurance product (such as claims assistance).

“The review found that the current commission arrangements for life risk insurance products should be maintained. This includes maintaining the current arrangements for clawbacks and commissions,” the explanatory memorandum said.

“However, the review found that, while a financial adviser has a duty to act in the best interests of the client about the advice provided, the prospect of receiving a commission creates a conflict for the adviser.

“Recommendation 13.7 recommended the law should address this conflict by requiring that an adviser should obtain a client’s consent before they accept the commission. The intention is that the consent requirement will support clients to understand how an adviser’s personal interest might influence the advice they are receiving on life insurance products.”

It added that if the client does not consent, then the adviser can either agree to provide the advice for a fee paid by the client or they can decline to provide the advice.

The long-term goal of this recommendation is to work in concert with the rest of the reforms to incentivise the provision of risk advice through fees and reduce the reliance on commissions.

“The intention is that the other recommendations will encourage more providers to offer to provide life insurance advice for a fee paid by the client and that over time commissions will play a lesser role in the distribution of life insurance,” QAR lead reviewer Michelle Levy wrote in the final report.

For more insight into the first tranche of legislation, specifically recommendations seven and eight, click here.