Good, Chris Joye’s Flying Circus:
In the AFR today I write that this is a great day for all Australian financial advisers and investors, and a brave decision by the Treasurer Josh Frydenberg, which was also vigorously advocated by Labor’s shadow financial services minister, Stephen Jones. Excerpt enclosed:
By banning fund managers from paying sales commissions to advisers/brokers to push their investment products, the Coalition reinstates the consumer protections under the Corporations Act that prevent these conflicts of interest.
These safeguards, known as the Future of Financial Advice (FOFA) laws, were legislated in 2012 and completely reshaped the Australian financial advice and funds management industries by aligning the interests of investors with their advisers. No longer would advisers flog specific products just to claim a hefty commission.
In 2014 the Coalition created a bizarre carve-out from FOFA for Listed Investment Companies (LICs) and Listed Investment Trusts (LITs), which allowed fund managers to pay advisers/brokers unlimited selling fees to market their investments. This was not permitted for any other managed funds, including ETFs.
The loop-hole resulted in an explosion in these product sales, which have performed poorly, especially in periods of stress, such as March 2020, when almost all LICs/LITs traded at enormous discounts to their claimed net tangible asset values, imposing massive capital losses on investors in these products.
By reapplying the Corps Act’s ban on conflicted remuneration to LICs/LITs, the Coalition is protecting mum and dad investors from extreme mis-selling risks while also creating strong competitive neutrality between all types of managed funds, be they LICs, LITs, ETFs or unlisted products. It will once again be a level playing field, which nobody can complain about.
As many would know, I have been writing about the need to protect FOFA since 2014, and have repeatedly highlighted this regulatory anomaly in the funds management domain. As a participant in the space, I am pleased that order has once again been restored to the advice and investment industries.
A big shout-out has to go to the AFR’s senior writer John Kehoe, who deserves a Walkley Award for his amazing reporting on the subject. This included his enormously controversial freedom of information disclosures that revealed for the first time that ASIC had repeatedly advised the government in 2013 to not create the LIC/LIT carve-out in the first place and then reiterated the need to reinstate the ban in 2019.
Quite right. Good job.