The Productivity Commission has once again called on the government to ban trailing commissions in the provision of financial advice, suggesting that this would reduce conflicts of interest.
The 700-page report scrutinised Australia’s superannuation (super) system and suggested that while the system delivers “good outcomes for many members”, the Productivity Commission (PC) outlined several concerns relating to structural flaws and inadequate competition leading to an erosion of members’ balances and “yawning gaps” in data on the actual outcomes individual members are experiencing.
For example, the PC found that a third of accounts (about 10 million) are “unintended multiple accounts”, which are eroding members’ balances by $2.6 billion a year in “unnecessary fees and insurance”.
Following a 12-month inquiry, the Productivity Commission put forward more than 30 recommendations to government to improve the super system, including the commission ban.
Echoing issues raised in the PC’s final report into Competition in the Australian Financial System, the body recommended that the Australian government look to ban the trail commissions paid to financial advisers in relation to superannuation, due to concerns over conflicts of interest.
The PC report found that 10 retail funds collected about $1.4 billion of advice fee revenue in 2017, charging their members about $341 per account in that year alone. Further, it noted that 11 retail funds identified in data from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry were estimated to have paid in excess of $400 million in (grandfathered) trailing adviser commissions in 2017.
“Conflicts of interest in the provision of financial advice would also be reduced by banning trailing commissions and lifting the quality of products across the board via elevated outcomes tests, which would remove the risk of members switching to persistently underperforming products,” the report reads.
The commission added, however, that advice fees are closely regulated in MySuper products (with funds only permitted to recoup the cost of intrafund advice from fee revenue), “thereby protecting members from undue balance erosion”.
“The disparate regulation of fees and costs in the choice and MySuper segments is in part contributing to poor member outcomes in the choice segment,” it said.
In conclusion, the PC said: “The Australian government should ban trailing financial adviser commissions in superannuation, to take effect as soon as practicable.
“These commissions remain in the system despite being grandfathered over five years ago as a transitional arrangement. The time for transition is over.”
The report also recommended that the government require that all fees charged should be levied on a cost recovery basis.
“These rules should be implemented and enforced by regulators in such a way that avoids gaming by funds and does not pose new barriers to member switching,” it said.
Treasurer Josh Frydenberg welcomed the commission’s findings, saying that the government would carefully look at the 31 recommendations.
“The government will carefully consider the recommendations and will await the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry’s final report before finalising our response to the Productivity Commission’s report,” he said.
Mr Frydenberg said that many of the government’s super reforms currently before parliament were endorsed by the report, including the automatic consolidation of low-balance inactive accounts and better reporting of expenses to improve transparency.
“It is time the Labor Party stopped blocking these amendments, listens to consumer advocates, independent experts and support what the commission calls ‘must-have’ common sense reforms that put the interests of members first,” he said.
While the PC report relates to financial adviser commissions in superannuation, the commission has previously argued for the abolition of trail paid to brokers as well.
As first outlined in the PC’s draft report and reiterated by the PC’s outgoing chair, Peter Harris, the commission told government last year that it should consider removing broker trail commissions, largely pointing to a belief that it is a conflicted form of remuneration that creates “perverse incentives” for brokers by “rewarding” them for keeping customers in their current loan.
The broking industry has widely slammed this recommendation, which was picked up on by the royal commission last year, with Aussie CEO James Symond recently suggesting that the reason for paying brokers has been “forgotten” and still forms a vital purpose.