SMSF regulation: conflicts of interest: commission arrangements

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.

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.