SMSF regulation: conflicts of interest: commission arrangements | ClearLaw Legal Bulletin

June 2006

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SMSF regulation: conflicts of interest: commission arrangements

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Lawyer in Profile

Chris Beeny
Partner, Commercial Group
Phone: 03 9288 0555

Chris Beeny is a partner in the Maddocks Corporate Commercial group. His principal areas of practice are superannuation, trusts, taxation, general corporate advice, company secretarial law and the law of charities and non-profit organisations. He also has extensive experience in private client work - wills and estates.

A special focus for Chris has been superannuation, where Chris has been involved in related tax, trust, Corporations Act and regulatory advice for more than 17 years and is recognised as one of Australia's leading legal practitioners.

Before joining Maddocks, Chris was a partner in the Melbourne office of Mallesons Stephen Jaques for 23 years.

The 1996/97 edition of Legal Profiles described Chris as an "outstanding expert on drafting and compliance matters". In the 1998/99 edition he was described as having an "in depth knowledge of superannuation, a strong customer focus" and being "proactive and responsive"; while in the 2000/01 edition he was described as "highly regarded in the area of superannuation law and having demonstrated a high degree of commerciality". In the most recent edition he is referred to as having the "ability to consider what are often difficult legal issues and recommend a course of action that is clearly understood by board members who have varying levels of business experience" and for his "knowledge of super matters beyond simply legal issues".

Chris's professional memberships include:

Member of the Commercial Law Section of the Law Council of Australia
Member of the Superannuation Committee of the Law Council of Australia
Founding member and current Chairperson, Superannuation Committee of the Law Institute of Victoria
Member, International Pension and Employee Benefits Law Association
Fellow, Taxation Institute of Australia
Member Association of Superannuation Funds of Australia
Member Australian Institute of Superannuation Fund Trustees.

As well as writing numerous articles and speaking at many conferences, Chris is a joint author of "Superannuation: A Practical Approach" (Leo Cussen Institute), a contributor on superannuation topics to "The Employment Factbook" (Centre for Professional Development) and a member of the Editorial Panel of "Australian Superannuation Law Bulletin" (Prospect Media).

The collapse of the Westpoint property group has prompted regulators to review:

whether Australian Financial Services Licensees are adequately managing conflicts of interest; and
whether self-managed super funds (SMSFs) are sufficiently regulated.

It has also added to the discussion of the "fee for service" model in preference to remuneration by commission.

Julian Smith

Westpoint sharpens the issues

As well as highlighting the inadequate regulatory structure for property-based investment schemes, the Westpoint collapse has led to discussion of other underlying regulatory issues — namely:

"SMSF's are under-regulated" Many of the investors in Westpoint were retail investors, often investing through self managed super funds. Given the importance of superannuation savings, the collapse is likely to lead to increased debate on whether the low level of regulation of SMSFs is inconsistent with the objectives of the superannuation system. Indeed, Treasury, ATO, APRA and ASIC have been discussing this issue.
"commissions cause conflict" It is alleged that financial planners received large commissions (up to 10%) for recommending retail clients invest in Westpoint. This creates a conflict between recommending the best investment or recommending the investment that provides the best benefit to the advisor. This conflict has to be managed. Two issues flow from this:
1. does the current requirement for AFS Licensees to manage and disclose any conflicts of interest adequately protect retail clients from conflicts?
2. should licensees be pushed towards the fee for service model?

Regulatory and Industry Developments

Conflicts Management: ASIC's case studies

Recently, ASIC released a discussion paper with case studies and practical suggestions for how licensees may manage conflicts of interest. This demonstrates ASIC's heightened surveillance of conflict-related issues — and potentially greater enforcement action. The discussion paper can be downloaded from www.asic.gov.au/ppp

ASIC has requested submissions in response to the discussion paper — which may lead to revisions of ASIC's Policy Statement 181 "Licensing: Managing Conflicts of Interest". That policy supports the law on the duties of AFS Licensees to manage conflicts, see Section 912A(1)(aa) of the Corporations Act 2001 (Cth).

Commissions v Fee for Service

ASIC's policy statement refers to the problems associated with licensees being remunerated on a commission basis — and the challenges this presents for managing conflicts of interest.

There is increasing media discussion of the relative merits of the fee for service model as an alternative to a commission model. Even, the Financial Planning Association's "Principles for Managing Conflicts of Interest", although not endorsing a fee for service model, emphasises the importance of financial planners separately identifying financial planning advice fees. Often these fees are difficult to determine, for instance if they are reflected in reduced rates of return from managed funds.

Summary

The Westpoint collapse, which predominantly affected retail investors, has brought a number of regulatory issues into sharper focus
The exposure of SMSFs to significant losses as a result of the collapse may result in a review of the "low-level" regulation of SMSFs
ASIC has started a campaign to promote compliance by AFS Licensees with their obligations to manage conflicts of interest
The collapse may also lead to increased industry, and perhaps regulatory, pressure to better disclose fees and to move away from a purely commissions-based fee model.

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