Financial advisers could still pocket commissions - options paper

The government may impose tougher ethical obligations on financial advisers to help confused consumers, but doesn't favour dropping commissions paid by providers such as fund managers or insurers to sell their products.

Commerce and Consumer Affairs Minister Paul Goldsmith has released an options paper on ways to improve the seven-year-old law for consumers, saying there were anecdotes that the current regime was "overly complex and that this has reduced access to financial advice."

Mr Goldsmith singled out rules around the disclosure of commission and potential conflicts of interest as being inconsistent, and that people "don't always know whether they are getting genuine advice or whether they are being sold a product."

The options paper retreads a number of issues raised when the legislation was working its way through Parliament around the competency and ethical obligations for advisers, which ultimately settled on the introduction of a two-tier system where Authorised Financial Advisers needed to meet a certain education and ethical standard to sell more complicated products, while Registered Financial Advisers simply needed to sign up to register to sell simpler services.

"We consider the current situation – with different advisers facing different ethical requirements but without clarity to the consumer that this is the case – needs to change," the Ministry of Business, Innovation, and Employment (MBIE) paper says.

"The current situation is confusing to consumers, who may not understand that some advisers are not required to act in their interests first.

"Consumers therefore cannot tell when they are being sold a product rather than being given unbiased advice and consumers may therefore place undue trust in advice," the paper says.

A Financial Markets Authority survey of AFAs covering the year to June 30, 2014, found commissions accounted for about 45% of their remuneration and bonuses about 40%.

While the MBIE paper didn't offer a preferred option on how to deal with the ethical and client-care obligations shortfall, it says a ban or restriction of conflicted remuneration, such as commissions, trail-fees or sales targets with bonuses is not preferred.

Other options on ethical obligations included extended ethical requirements for all financial advice services, distinguishing between sales and advice, or a suitability requirement for product sales, all of which had more negatives attached than positives.

In the case of a commission ban, the paper identified more positives than negatives, in that it would give customers more assurance advice wasn't motivated by conflicted remuneration, would raise perceptions about the industry, and if limited to a sub-set of advisers could let them market themselves as independent.

The pitfalls were that it could limit advice for those unwilling or unable to pay upfront, and could be difficult to implement without creating a loophole.

The stance on commissions comes as a number of insurers quit their industry body, the Financial Services Council, after research funded by the body recommended a crackdown on the fees paid to advisers by the life insurance sector.

Other areas canvassed by the paper include a preference to remove the distinction between class and personalised advice, allowing the use of robo-advice, introducing entity licensing and possibly extending that to individual advisers, and reviewing information disclosure to make it more relevant to consumers.

(BusinessDesk)