Frydenberg FOFA banking royal commission
Treasurer Josh Frydenberg (Image: AAP/Lukas Coch)

The government yesterday announced it had “agreed to take action on all 76 recommendations” from the Hayne royal commission. You’ll note the peculiar wording, covering the fact that it didn’t want to draw too much attention to how it was actually only going to implement 75 of them.

Hayne’s recommendation that mortgage broking be moved fully to a fee-for-service model in which borrowers would pay brokers, not the banks, has too many people worried — not just mortgage brokers, but people concerned about banking competition. The government instead will ban trailing commissions and volume-based commissions for brokers, but won’t prevent banks paying brokers. That’s a step too far.

There was another thing missing from the government’s response, too. An apology.

Because in its commitment to the other 75 recommendations, the Liberal Party is finally agreeing to do some of things it fought tooth and nail to prevent Labor from doing in the Future of Financial Advice (FOFA) reforms in the Gillard years. One of the biggest brawls around FOFA was what was called “opt-in” — the requirement that every year, financial advisers would have to obtain the explicit agreement of their clients to charge them fees.

The Coalition fought opt-in on behalf of its big bank donors and the Liberal Party-aligned financial planning industry, which ripped billions from consumers via ongoing commissions that consumers often didn’t even know about, let alone agree to. The Coalition and industry wanted “opt-out” — i.e. it was up to consumers to tell advisers to stop charging them, never mind that they might not even know what they were being charged.

The Liberals insisted this was about some sort of mystical personal freedom. As late as 2014, when Mathias Cormann was trying to gut FOFA, he was insisting “what it is really saying is that as a consumer I am not free to enter into an ongoing contractual relationship with my financial advisor. It is none of the Government’s business to tell me how long I can or cannot enter into a contractual relationship with my financial advisor. If I want to sign up for one year, five years, 10 years, ongoing that is a matter for me.”

The compromise that the Gillard government settled on to get FOFA through the crossbench in the House of Representatives, in the face of implacable Liberal opposition, was opt-in, but every two years, and only prospectively. 

Now Hayne has demanded the original FOFA annual opt-in be applied, and to all agreements, grandfathering be damned. The government has meekly agreed. The rhetoric of rugged individualists happily agreeing to be bilked for ten years by their advisors has mysteriously vanished. If the Liberals hadn’t been so steadfast in their determination to protect the big banks and financial advisers, much of the “fees for no service” scandal of recent years would never have occurred.

Don’t hold your breath waiting for an apology from them.

In fact, the Liberals are still trying to protect their industry mates. Another contentious area of FOFA — its ban on forms of conflicted remuneration like trailing commission — was also watered down so that existing commissions before 2013 were grandfathered. This created a huge incentive for advisers and major institutions to keep customers in poor-performing products rather than move them to better-performing ones that would not have grandfathered commissions.

Hayne, it’s fair to say, hates grandfathered commissions and hates arguments for their retention even more — especially the claim that a ban might be unconstitutional. He recommended that “grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable.”

Pretty clear, huh? It would take parliament two minutes to remove the relevant exemption that it put in place in 2012. Most of the major institutions are already moving partly or fully away from grandfathered commissions in the wake of royal commission anyway. But what will the government do instead? It wants to wait another two years.

“The government agrees to end grandfathering of conflicted remuneration effective from 1 January 2021,” it announced yesterday, more than a decade after the FOFA reforms were first unveiled. Watch financial planners start lobbying to push that date back even further, citing “transitional issues” and “the need for certainty” and impacts on the industry.

The money involved is huge. The Productivity Commission noted in its most recent report on superannuation

at least 2% of member accounts are still subject to trailing adviser commissions — despite such commissions being banned since 2013 … Eleven retail funds identified in data published by the Royal Commission are estimated to have collected in excess of $400 million in such trailing commissions in 2017 alone. While largely a legacy problem, these commissions can materially erode member balances.”

Funnily enough, there’s no move by Treasurer Frydenberg or the government to require those funds to repay the billions taken since 2013. The Liberals never wanted FOFA, never wanted a royal commission, and are still dragging the chain despite what we’ve learnt over the last twelve months.

As Upton Sinclair famously said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”