SMSFs were explicitly excluded from the Banking Royal Commission terms of reference, but there are still implications for the sector. I have outlined a summary and some comments on some of the key recommendations below.
Recommendation 2.1 – Annual renewal and payment
Ongoing fee arrangements must be renewed annually by the client in writing outlining the services a client is entitled to receive and fees to be charged. Quite frankly, I’m amazed this was not already required as this is the least you should expect from a trusted adviser and a professional relationship.
Recommendation 2.2 – Disclosure of lack of independence
Financial advisers will be required to give retail clients a written statement prior to providing personal advice, explaining why they are not independent, impartial or unbiased. This will hopefully bring more transparency to situations were an institution controls the business of an adviser and pays them commissions, so they distribute their products.
Recommendation 2.4 – Grandfathered commissions
The commission recommended that grandfathering provisions for conflicted remuneration “should be repealed as soon as is reasonably practicable”. This is long over due and goes to the heart of the issue of conflicted remuneration and fees for no service.
Recommendation 3.3 – Limitations on deducting advice fees from choice accounts
Prohibiting the deduction of any advice fee (other than for intra-fund advice) from super accounts other than MySuper, unless the requirements regarding annual renewal, prior written identification of service and provision of the client’s express authority (as per Recommendation 2.1) are upheld regarding ongoing fees. This is common sense, but it will be interesting to see if this limits access to advice in the non-SMSF sector.
Recommendation 3.4 – No hawking
Prohibition of hawking any super products, except to non-retail clients and offers made under an eligible employee share scheme. Hopefully, this will address the spruiking of SMSFs by one-stop property shops, real estate agents and cold-calling centres.
Recommendation 3.7 – Civil penalties for breach of covenants and like obligations
The commission called for civil penalties for any breach of trustee and director covenants. SMSF trustees already have an obligation in fiduciary duty to act in the best interests of fund members by virtue of trustee law and the SMSF trust deed. This change should give ASIC some additional powers to stop abuses by one trustee that may act to the detriment of other members in the SMSF.
Recommendation 7.1 – Compensation scheme of last resort
The commission urged previous government recommendations to establish a compensation scheme of last resort be enacted. This is a positive move to provide SMSF members access to the same government financial support as other APRA regulated funds in the event of fraud or theft.
Overall, the Hayne Recommendation won’t have a big impact on SMSFs as most trustees / clients are highly engaged in the process and more likely to have an active ongoing arrangement with their adviser. However, the ramification for the wider industry will be significant as conflicted remuneration (commissions) is removed along with the practice of charging fees for no services. This will surely see many advice businesses face up to significant change, be sold or go bust!
The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.